Unlocking Opportunities in Retirement Accounts

As we step into the second half of 2025, a remarkable trend is emerging: an estimated 485,000 Americans now qualify as “401(k) millionaires.” This impressive milestone, bolstered by stock market rallies, is not just a number—it represents an extraordinary opportunity for professional advisors to encourage strategic philanthropic giving among your affluent clients.

These individuals, often distinguished by their charitable inclinations, are sitting on sizable sums in retirement accounts that can be leveraged to achieve their philanthropic ambitions—while maximizing tax advantages.

How traditional and Roth IRAs, 401(k)s give you an edge

For your clients, particularly those with lighter tax liabilities, donating retirement assets can be both strategic and impactful. When clients designate a public charity—or a donor advised fund* at Greater Houston Community Foundation—as a beneficiary of a traditional IRA or an employer-sponsored retirement plan, the benefits can be manifold. 

Fully incorporating the donation of retirement assets into their financial plans can represent a lot more than just a boost in year-end giving; on the contrary, the impact can be transformative.

*Continue reading: How does a DAF work?

Benefits of donating retirement assets

1. Pre-tax contributions: the basics of tax benefits

Contributions made to traditional IRAs and 401(k) plans are considered “pre-tax” by the IRS. This means your clients can increase their retirement savings tax-deferred. They enjoy knowing that their charitable intent can also yield significant tax benefits over time, potentially increasing funds available for their philanthropic goals.

2. Tax-free growth: a strategic advantage

Assets within IRAs and qualified retirement plans grow tax-free until distribution. This accumulation allows the funds to flourish, benefiting your client and their potential chosen charities in the long run. An informed strategy could amplify the overall impact of their philanthropy—without compromising retirement funds.

3. Charitable bequests: efficiency in giving

Upon the account holder’s death, and when a traditional IRA or qualified plan is passed on to a charity, no income or estate taxes are levied on those assets. In contrast, naming heirs as beneficiaries could leave them facing significant income and estate tax liabilities on distributions, diminishing the wealth passed to the next generation. By directing these assets to charitable causes, clients can make their legacy even more meaningful—while sidestepping potential tax burdens.

Continue reading about popular giving vehicles:

A case for strategic asset allocation

When clients are contemplating how to allocate their investments in their estate plans—particularly in choosing between stocks and retirement funds—naming a charity as the beneficiary of an IRA while leaving appreciated stock to heirs is often the optimal decision. The heirs can benefit from “stepped-up basis” on inherited stock, avoiding capital gains taxes on pre-death appreciation, while the charity receives the total value of retirement accounts untaxed.

Case study: the philanthropic strategy of Elena & Cameron Foster

Elena and Cameron Foster are long-time residents of Houston, where they have established successful careers and raised a loving family. As accomplished professionals on the brink of retirement, they reflect on their journey with pride, having built a life rich in both professional achievements and built a strong family life.  

With deep roots in the community and a commitment to their children’s future, they are now eagerly anticipating the next chapter of their lives. With significant savings in their 401(k) plans and a strong desire to support local educational initiatives, they turned to their financial advisor for guidance.

The Fosters have amassed a combined retirement portfolio totaling $2.5 million, including $1.5 million in their 401(k) plans and $1 million in other investments like stocks. They want to leave a meaningful legacy that aligns with their values, specifically supporting scholarship programs for underserved students in their community. They also want to minimize the tax burden on their heirs.

Strategic Philanthropic Planning: Honoring Donor Intent

Their financial advisor conducted a thorough review of their assets and derived a plan with a Philanthropic Advisor at Greater Houston Community Foundation leading to the following strategies:

• Beneficiary Designation: The Fosters named Greater Houston Community Foundation (Foundation), as the beneficiary of their combined 401(k) plans. This allowed their retirement savings to go directly to The Foster Family Scholarship, avoiding any estate or income tax while maximizing the amount available to support underserved students in their community.
• Stock Allocation: Instead of naming their children as beneficiaries of their IRAs, the Fosters allocated $1 million worth of high-appreciation stock to their heirs. Because of the “stepped-up basis,” their children will not incur capital gains taxes when they sell the stock after their parents’ passing.
• Qualified Charitable Distributions (QCDs): At age 70½, The Fosters took advantage of QCDs, maximizing their combined deductions of $210,000 annually from their IRAs to The Foster Family Educational Fund, an Endowed Designated Fund at the Foundation, each year. This strategically reduced their taxable income while setting up an endowed fund to support their favorite nonprofits in perpetuity.

By working with their trusted professional advisors, the Fosters determined the best giving strategy for their unique situation, support their community, and ensure their children receive more wealth without a significant tax burden. Additionally, they established a legacy through the scholarship fund, impacting countless students long after their passing.

The case study presented in this blog is a fictionalized account of real-world scenario, created for educational purposes only.

FAQ about retirement account giving

Your clients will likely have questions about using their retirement funds for charitable purposes—while the process of amplifying the impact of retirement accounts and reaping the benefits may be complex, the answers to these questions don’t have to be. 

Can I donate my IRA to charity without paying taxes?

Yes, there are several tax-efficient ways to donate IRA assets to charity, each with distinct advantages depending on your client’s situation and timing preferences.

• The most straightforward approach involves naming a qualified charitable organization as the beneficiary of a traditional IRA. When the account holder passes away, the charity receives the full value of the IRA without any income or estate tax consequences.
• For clients who want to begin their charitable giving during their lifetime, QCDs offer an excellent solution. Available to account holders aged 70½ and older, QCDs allow direct transfers from traditional IRAs to qualified charities without the distribution being treated as taxable income.

The key consideration is that these tax benefits apply specifically to traditional IRAs and qualified retirement plans. Roth IRAs, while offering different advantages, don’t provide the same tax benefits for charitable giving since contributions were made with after-tax dollars.

Can you gift 401(k) assets?

While 401(k) plans offer significant opportunities for charitable giving, the approach differs from IRAs and requires careful planning to maximize effectiveness.

• Similar to IRA designation, the most common and effective strategy for donating from a 401(k) involves naming a qualified charity as the beneficiary of a 401(k) plan.
• Direct charitable distributions from 401(k) plans during the account holder’s lifetime are generally not permitted while still employed.
  • Once retired, some 401(k) plans allow for in-service distributions, but these are typically subject to income tax and may not qualify for the same preferential treatment as QCDs from IRAs.
• Clients who want to make charitable gifts from their 401(k) during their lifetime may benefit from rolling the 401(k) into a traditional IRA upon retirement or job change. This rollover maintains the tax-deferred status of the funds while opening up additional charitable giving opportunities.

It’s also important to note that Roth 401(k) assets, similar to Roth IRAs, don’t provide the same tax advantages for charitable giving since contributions were made with after-tax dollars.

Are there disadvantages of a QCD?

While QCDs offer substantial benefits, there are potential limitations and considerations that may affect clients’ overall giving strategy.

• The most significant limitation is the annual cap of $108,000 per individual (as of 2025, adjusted annually for inflation).
• QCDs also don’t generate a charitable tax deduction, which might initially seem counterintuitive. It’s important to remind clients that the distribution isn’t treated as taxable income in the first place, and that the net effect is still more favorable than taking a distribution, paying taxes, and then claiming a charitable deduction.
• Another consideration is that QCDs must be made directly from the IRA trustee to the qualified charity. This means there might be reduced flexibility, and less opportunity for staying involved over time.
• Timing can also present challenges. QCDs must be completed by December 31st to count toward that year’s required minimum distribution, and the process can take several weeks to complete.

None of these considerations are inherent disadvantages, and QCDs remain one of the most tax-efficient charitable giving strategies available to clients with traditional IRAs. With the help of trusted advisors, many donors with retirement accounts can benefit from making QCDs directly to charities. 

Partnering for purpose

As your trusted partner in philanthropy, the Foundation is eager to collaborate with you to ensure your clients not only meet their personal and financial goals but also flourish in their philanthropic endeavors. Engaging in conversations centered around strategic giving can deepen your client relationships and enhance their legacy.

For the charitable 401(k) millionaires next door, leveraging retirement accounts for philanthropy isn’t just smart; it’s a hallmark of their values and vision. As philanthropic advisors, our role is to illuminate the pathways that align financial wisdom with profound charitable impact. Let’s embark on this journey together transforming the wealth your clients have built into a legacy that resonates for generations to come.

Are your clients currently working with a trusted investment management team? If so, they can maintain that relationship while managing the assets in their donor advised fund, if their fund balance is $500,000 or above.

Call us at 713-333-2210 or reach out to Andrea Mayes today to learn how our expertise can effortlessly incorporate your clients’ charitable giving objectives into their estate planning strategies.

More Helpful Articles by Greater Houston Community Foundation: 

• Why Donating Appreciated Stock Makes Financial Sense
• How to Donate Shares of Privately Held Companies
• How to Donate Business Interests Strategically
• How Do Community Foundations Work?
• How Does the Charitable Giving Tax Deduction Work?

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