Empowering 401(k) Millionaires: Unlocking Charitable Opportunities in Retirement Accounts
As we step into the second half of 2024, 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.
The Philanthropic Edge of Retirement Accounts
For your clients, particularly those with lighter tax liabilities, the potential to use retirement accounts as vehicles for charitable giving is 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 financial benefits can be transformative. Here’s what makes these accounts strong allies in philanthropy:
1. Pre-Tax Contributions: The Foundation 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:
What is a donor-advised fund?
How to create a scholarship fund
What is a private foundation?
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 advisor, 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.
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.
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:
- How to start a scholarship fund?
- The Importance of Charitable Giving in Financial and Estate Planning
- The Future Is Now: What Is Next-Gen Philanthropy?
- How to Give Back to Your Community
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