Managing 401(k) drops: Lemonade from lemons

It is important to know right now that your donors may be feeling the squeeze with their 401(k)s and IRAs. In many cases, account balances can fluctuate significantly due to market swings, especially for those heavily invested in stocks. This may leave your donors feeling a little (or a lot) on edge.

Now that donors are paying more attention to their 401(k)s and IRAs, you’ve got a real opportunity to remind them about the benefits of naming your organization as the beneficiary of a retirement plan. Here’s an example of why this is so advantageous:

When a donor names your organization as the beneficiary of an IRA, you’ll receive the entire IRA balance without paying any income tax. This, in turn, means that the full value of the account stays with you. By contrast, if the donor’s children were to inherit the IRA, they would have to pay ordinary income tax on withdrawals. What’s more, under the SECURE Act, they are required to withdraw the entire balance within 10 years, potentially pushing them into higher tax brackets and reducing the after-tax inheritance.

On the other hand, if your donor’s estate plan leaves the appreciated stock to children, the tax result is very different. Here’s why: When the children inherit the stock, it’s subject to a "step-up in basis” to its fair market value at the date of the donor’s death. This means that if the donor’s children sell the stock immediately after inheriting it, they won’t owe capital gains tax on the appreciation that occurred during the donor’s lifetime. Of course, if the donor were to leave the stock to your organization, you would also avoid capital gains tax, but because the IRA is a far less tax-efficient asset for heirs, it's better to allocate the IRA to charity and the stock to children.

Please reach out to the experienced KCF team for ideas and tips about communicating this opportunity to your donors to help you grow your endowment assets. Now is the time to encourage donors to name your organization as the beneficiary of IRAs. It’s a strategy that maximizes the after-tax value received by both a donor’s heirs and your organization.