Retirement Plan Assets

At a Glance

Retirement plan assets used for charitable giving purposes may offer substantial tax benefits to donors, especially when used to make testamentary gifts. These gifts will be deductible for federal gift or estate tax purposes and often for state death tax purposes as well.

Unlike a noncharitable beneficiary, a charity generally will owe no federal or state income taxes on such a gift which would be taxed as Income in Respect of a Decedent (IRD) if received by an individual beneficiary following a plan participant's death (more on IRD later).

Retirement plan assets are a substantial source of wealth for many potential donors, and the largest single holding of some. Such assets may be held in:

 Profit-sharing plans

 Defined benefit plans

 Money purchase plans

 Employee Stock Ownership Plans (ESOPs)

 Individual retirement arrangements and annuities (IRAs - Traditional or Roth)

 Section 401(k) plans

 Section 403(b) annuities

 SIMPLE IRA plans (Savings Incentive Match Plans for Employees)

 Governmental plans

 457(b) eligible plans

 409A Nonqualified deferred compensation plans

Because of the complex legal rules related to retirement plan assets, careful planning is necessary when contemplating lifetime or testamentary gift of IRA or retirement plan assets to a charity.

Tax Treatment of Qualified Retirement Plans and IRAs

A general understanding of how retirement plans and IRAs are taxed is an important backdrop for promoting charitable gifts of retirement plan assets.

Although contributions to qualified retirement plans and, in some cases, IRAs are made on a pretax basis, and earnings on such contributions grow tax-deferred, the tax advantages generally disappear at the time of distribution. Indeed, some tax experts refer to retirement plan assets as "tax-cursed" when it comes time for distribution. That's because plan participants or their beneficiaries must eventually pay income taxes on all pre-tax contributions and earnings during the asset accumulation phase.

Taxation of Distributions

Distributions from qualified retirement plans and IRAs are generally taxed under the annuity rules of IRC Section 72. These rules provide for the recovery of basis pro-rata, over the expected duration of payments, by means of an exclusion ratio. However, unless a participant has a tax basis in the plan, usually as the result of having made after-tax (nondeductible) contributions, the entire income from the plan will be taxed as ordinary income.

In addition, the distributions may be subject to state and local income taxation that could substantially increase the marginal tax rate in higher-tax jurisdictions.

A further penalty tax of 10% will be levied on distributions made prior to age 59½, unless an exception applies to shield the distribution from the premature distribution tax—for example, birth or adoption of a child, death or disability, terminal illness, separation from service after age 55, or distribution in a series of substantially equal periodic payments over a participant’s life expectancy or the life expectancies of a participant and a designated beneficiary. Other exceptions exist under IRC Section 72(t). The old lump-sum distribution rules that formerly provided income tax relief to many recipients now cover only grandfathered individuals born prior to 1936.

The 20% maximum tax rate available for most long-term capital gains is not applicable to distributions from qualified retirement plans or IRAs, even the portion of earnings that represents capital gains on plan contributions.

Distributions after Participant's Death

For qualified retirement plan and IRA accumulations at a participant's death, federal and state death taxes can be another source of depletion for heirs unless transferred to a spouse or charity, or covered under the applicable exclusion.

In addition, if grandchildren or even younger beneficiaries are to receive payments from the qualified retirement plan or IRA, then federal and possibly state generation-skipping transfer taxes may apply. The result could be that a significant percentage of retirement accumulations would be lost to combined taxes at the participant's death.

This brings us to IRD, an understanding of which is essential for discussing charitable gifts of retirement plan assets.

Income in Respect of a Decedent (IRD)

At a Glance

IRD includes income items to which a decedent had a right at death, but which, as a result of the taxpayer's tax accounting method, were not included in the decedent's gross income. IRD is includible in the decedent's gross estate. But it is also gross income to the person who receives the IRD through inheritance. In some instances, IRD items may be taxed to the estate itself or to a testamentary trust.

Common IRD Items

Common IRD items include accrued income earned, but not received, by a decedent who reported income under the cash method of accounting. Earned but unpaid wages, salaries or commissions, accrued vacation pay payable upon death, accrued interest on certificates of deposit or U.S. savings bonds, and income from sales or exchanges completed before death may also give rise to IRD.

Retention of Income-Tax Character

IRD retains its income-tax character in the hands of the person receiving it. Thus, income which would have been ordinary income, long-term capital gains, or tax-exempt income to the decedent will retain that same character in the hands of the recipient, so long as the right to receive the income passed by reason of the decedent's death.

Retirement Plan Assets Are IRD

Qualified retirement plan and IRA distributions made following the participant's death are IRD items includible in the gross income of the beneficiary in the year received. But a qualified public charity that receives IRD has a big advantage over an individual recipient of such income. The charity is income tax-exempt and can receive the IRD free of the negative income tax consequences which normally follow IRD.

Thus, the tax rules for IRD encourage retirement plan participants to bequeath more favorably taxed assets to their personal beneficiaries, and to provide for their charitable beneficiaries with IRD assets. While an IRD asset will be includible in the donor's gross estate, its value in the estate will be offset by the estate tax charitable deduction for any portion given to a charity.

Example

Let's look at an example:

The decedent's gross estate is $20,000,000, $3,000,000 of which represents the value of the decedent's traditional IRA. Assume that the decedent died in 2026, there are no other IRD items in the estate, that the decedent was unmarried, and that the decedent made no lifetime taxable gifts. The decedent's combined federal, state, and local income tax bracket is 48%.

The prospect of losing a large percentage of one's retirement assets to combined income and estate taxes should get a donor's attention. All those years of thrift, wise investments and foregoing current consumption to build up a retirement nest egg have come to this? But if qualified retirement plan or IRA assets are used to achieve an individual's charitable goals, while more favorably treated assets are used for family bequests, both the charity and the heirs will benefit.

Example of Leaving IRD to Charity

Let's look at an illustration of the positive effects of leaving IRD to charity versus a family beneficiary.

Same facts as previous example. The decedent's gross estate is $20,000,000, $3,000,000 of which represents the value of the decedent's IRA, which he will now leave to charity rather than to family members. Assume that there are no other IRD items in the estate, and that the decedent has made no lifetime taxable gifts.

Because the IRA is left to charity, it does not generate estate tax or a Section 691(c) income tax deduction for IRD. The charity pays no income tax on the IRA since it is income tax-exempt. And because no other IRD is includible in the decedent's estate, family members will receive their inheritances free of any trailing income tax consequences. Indeed, their tax basis will step up to the estate tax value of the property received, resulting in less gain on a subsequent sale of the property.

In a private letter ruling, the IRS ruled that the assignment of three IRA accounts by a decedent's estate, in satisfaction of a charitable bequest in the decedent's will, did not result in income to either the estate itself or its beneficiaries. The charity will have IRD, but the income will not be taxed because of the charity's exempt status [Ltr. Rul. 200234019].

Required Minimum Distributions

Basics of Required Minimum Distribution

To ensure that retirement accounts are not merely vehicles used to transfer assets to heirs, thereby avoiding income and estate taxes, IRS rules require that participants must withdraw specified minimum amounts each year. In this way, the government "harvests" taxes that participants avoided through pre-tax contributions and tax-deferred growth during the accumulation phase of their retirement saving.

These required minimum distribution (RMD) rules apply to traditional IRAs and qualified defined contribution plans including profit sharing, money purchase, 401(k), and 403(b) plans. For convenience, we will use "account owner" or simply "owner" to refer to both individual account owners in qualified defined contribution plans and owners of traditional IRAs.

The Age 73 Requirement

Participants in qualified retirement plans, SEP-IRAs, SIMPLE IRAs, and traditional IRAs (but not Roth IRAs) may not accumulate tax-deferred earnings indefinitely. Eventually, they must begin to take required minimum distributions (RMDs) or suffer a heavy penalty tax. RMDs are included in the recipient’s gross income (with tax-free recovery of basis, if any) as paid out.

Required Beginning Date

The required beginning date (RBD) is April 1 of the year following the year in which the account owner attains age 73. This is the latest date on which the owner can take the first RMD from the account without a penalty tax.

For example, if the owner reaches the RBD on August 20, 2026, the latest date for the 2026 distribution is April 1, 2027. By waiting until the RBD, the owner has two distributions in 2027—the 2026 distribution by April 1 and the 2027 distribution by December 31. Depending on the situation, it may be better tax planning to take the 2026 distribution by December 31, 2026. The owner will need to take future RMDs by December 31 of each new tax year to avoid the excise tax.

However, an account owner may delay the RBD until April 1 of the year following the year they actually retire (if later than their RBD) under two conditions:

1. the distribution is from a qualified retirement plan and not an IRA (including SEP IRAs and SIMPLE IRAs), and

2. the account owner owns 5% or less of the company that maintains the plan.

25% Excise Tax

Account owners who fail to comply with the RMD rules pay a severe penalty—a 25% excise tax on the difference between the amount that should have been distributed (the RMD) and the amount that was actually distributed. The penalty is reduced to 10% if the distribution error is corrected quickly.

For example, if an owner should have taken a $50,000 RMD but only took a $30,000 distribution, the penalty would be $5,000 (25% of the $20,000 the owner failed to take). If the owner quickly corrected the error and took out the remaining $20,000, the penalty would be reduced to $2,000. This penalty tax is in addition to the ordinary income tax due on the distribution (assuming zero basis).

Uniform Lifetime Table

The Uniform Lifetime Table [Reg. Sec. 1.409(a)(9)-9] is used to calculate lifetime required minimum distributions from qualified defined contribution plans (including 401(k) and 403(b) plans) and IRAs unless the employee's beneficiary is a spouse who is more than 10 years younger, or unless the spouse is not the sole beneficiary.

If the employee's sole beneficiary is a spouse, and that spouse is more than 10 years younger than the employee, click here to use the appropriate life expectancy from the Joint and Last Survivor Table.

To determine the required minimum distribution for any "distribution calendar year" (a calendar year for which a minimum distribution is required), find (1) the account balance on the last valuation date of the preceding year, (2) the account owner's age on his or her birthday in the distribution calendar year, and (3) the divisor that corresponds to that age in the Uniform Lifetime Table. The required minimum distribution for the distribution calendar year is (1) divided by (3).

First Year Distribution: As noted above, RMDs must begin when an account owner reaches the required beginning date. However, the owner may delay the first RMD until April 1 of the following year.

For purposes of making the first distribution, the first "distribution calendar year" is the year an account owner reaches their RBD. Valuation of the account is based on the account value on December 31 of the preceding year.

The account value is divided by the applicable distribution period taken from the Uniform Lifetime Table and based on the owner’s age on the owner’s birthday in the relevant distribution calendar year.

Second Year Distribution: The RMD for the first distribution calendar year is the only one that can be distributed after December 31 without penalty. For any subsequent distribution calendar year, the required minimum distribution must be distributed by December 31 of that year.

The following table converts the factors from the Uniform Lifetime Table into percentages of the account balance that must be distributed. These percentages are rounded to two decimal places, so don’t rely on them to calculate the actual RMD! The table illustrates that a strategy to defer taxation as long as possible by taking only required minimum distributions is fairly easy. For example, at age 80 the RMD is only about 4.96%. Account earnings greater than 4.96% would cause the account to continue to grow even while the owner meets the RMD rule and avoids the 25% excise tax penalty (10% if the distribution error is corrected quickly).

To see an illustration of the "crossover point" based on the Uniform Lifetime Table, click here.

The following table converts the factor from the Uniform Lifetime Table into the percentage of the account balance (as of December 31 of the preceding year) that must be distributed. These figures are rounded to two decimal places, so don’t rely on them for actual RMD calculations!

Uniform Lifetime Table Factors Converted to Percents
Age	Percent		Age	Percent
73	3.78		97	12.83
74	3.93		98	13.70
75	4.07		99	14.71
76	4.22		100	15.63
77	4.37		101	16.67
78	4.55		102	17.86
79	4.74		103	19.24
80	4.96		104	20.41
81	5.16		105	21.74
82	5.41		106	23.26
83	5.65		107	24.40
84	5.96		108	25.65
85	6.25		109	27.03
86	6.58		110	28.58
87	6.95		111	29.42
88	7.30		112	30.31
89	7.76		113	32.26
90	8.20		114	33.34
91	8.70		115	34.49
92	9.26		116	35.72
93	9.91		117	37.04
94	10.53		118	40.00
95	11.24		119	43.48
96	11.91		120	50.00

You can see that even a 90-year-old account owner has to take an RMD of only 8.20% of the remaining account balance.

So, not only are charities more likely to be designated as beneficiaries of IRA and qualified plan accounts, but in many cases there will be more remaining in the account for charity than under the prior rules.

The Inherited IRA and Distributions Following an Account Owner's Death

Until now, we have discussed the RMD rules as they apply to distributions made during the owner’s life. The rules that follow apply after the owner's death. These rules apply to traditional IRAs, qualified defined contribution plans, and 403(b) plans. We will continue to use "account owner" and "owner" to refer to both qualified plan account owners and owners of traditional IRAs.

Distinguishing Between the 'Designated Beneficiary' and the 'Eligible Designated Beneficiary'

The SECURE Act of 2019 introduced the concept of an "eligible designated beneficiary" (EDB) to distinguish such beneficiaries from all other living designated beneficiaries. Eligible designated beneficiaries may continue to use the Single Life Table below to calculate required minimum distributions. All other living designated beneficiaries must receive the entire amount in the inherited IRA by the end of the tenth year following the year of inheritance.

IRS regulations finalized on July 18, 2024, bifurcated the ten-year rule and created two classes of designated beneficiaries with different distribution rules based on the owner's age on their date of death. If the original owner died before their RBD, then the account must be liquidated by December 31 of the tenth year following death. There are no required minimum distributions in years 1 through 9. If the original owner died after they began taking required minimum distributions, the designated beneficiary must take annual RMDs in years 1-9, and the entire account balance must be liquidated by December 31 of the tenth year following the original account owner's death.

Beginning in 2020, the determination of whether a designated beneficiary is an EDB is made as of the date of the account owner's death. Eligible designated beneficiaries include:

1. the surviving spouse of the account owner

2. a minor child of the account owner*

3. a disabled individual (within the meaning of IRC §72(m)(7))

4. a chronically ill individual (within the meaning of IRC §7702B(c)(2))

5. an individual who is not more than 10 years younger than the owner

*On the day a child reaches the age of majority, he or she is no longer considered an eligible designated beneficiary and the 10-year period begins, by the end of which all assets in the account must be distributed.

Of course, for purposes of determining RMDs, only an individual can be an eligible designated beneficiary. If a non-individual (such as a charity) is named as a beneficiary of a plan account, the account will be treated as having no designated beneficiary. This applies even if there are individuals designated as beneficiaries along with the non-individual.

The deceased owner's estate cannot be a designated beneficiary and there are no provisions that allow for a "look through" to the individual beneficiaries of the estate.

However, when the owner names a trust as beneficiary of a retirement plan or IRA account, the trust beneficiaries can qualify as designated beneficiaries if all of the following are true:

1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.

2. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the owner.

3. The trust instrument identifies the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit.

4. The trustee is provided a copy of the trust with an agreement that if the trust is amended, the plan administrator will be provided a copy of the amendment.

Trusts can provide numerous advantages including creditor protection, divorce protection, special needs, and investment management. There can be other advantages to using trusts as beneficiaries where, for example, the account owner has young beneficiaries and large dollar amounts. Because of changes enacted under the SECURE Act and the complex nature of trust planning, clients should seek legal counsel before making such planning decisions.

Distributions to Eligible Designated Beneficiaries

An EDB must use the Single Life Table (see below) to calculate RMDs on inherited IRAs and plan accounts. The Uniform Lifetime Table is only used for distributions during the owner’s lifetime.

The RMD is calculated using the EDB's age as of his or her birthday in the calendar year following the account owner’s death, which is the year that distributions must begin. After the first distribution year, the EDB reduces life expectancy by one for each subsequent year.

EXAMPLE: You are the owner's EDB figuring your first required minimum distribution. The owner died in 2025. In 2026, you turn 57 years old. The Single Life Table life expectancy factor for age 57 is 29.8. The account value on December 31, 2025, was $1,000,000 and your 2026 RMD was $33,557 ($1,000,000/29.8). In 2027, the factor is 28.8 (29.8-1) so you would divide the December 31, 2026, account balance by 28.8 to determine the 2027 RMD. In 2028 the factor is 27.8 (29.8-2).

If the owner’s sole designated beneficiary is the surviving spouse, the first distribution year is the year in which the owner would have reached age 73. After the first distribution year, the spouse will use their own age as of their birthday in each subsequent year.

EXAMPLE: The owner died in 2025. You are the owner's surviving spouse and the sole designated beneficiary. The owner would have turned age 73 in 2025 so distributions must begin in 2026. You, as the surviving spouse, turn 69 in 2026 and your life expectancy from the Single Life Table for age 69 is 19.6. If the account balance on December 31, 2025, was $1,000,000, your RMD is $51,020 ($1,000,000/19.6).

As illustrated above, an EDB uses the life expectancy factor that corresponds to his or her age in the year after the owner’s death. The factor is then reduced by one for each succeeding distribution year.

EDBs who are spouses, and who do not elect to roll over the account or treat it as their own, also use the Single Life Table, but they can recalculate the RMD each year using the factor for their then-current age.

Single Life Table

The final regulations on required minimum distributions [Reg. Sec. 1.401(a)(9)-9] promulgate a "Single Life Table" that eligible designated beneficiaries are to use to calculate RMDs on inherited IRAs and plan accounts. EDBs do not use the Uniform Lifetime Table, which is only for distributions during the owner's lifetime.

When the owner dies BEFORE reaching the required beginning date: When an account owner dies before reaching the required beginning date, the assets in the account must be distributed as follows:

1. The life expectancy method: Eligible designated beneficiaries use the life expectancy method. With respect to a non-spouse EDB, required minimum distributions must start on or before the end of the calendar year following the calendar year in which the owner died. (Since the owner did not reach age 73—the age at which required minimum distributions begin—no distribution is required in the year of the owner's death.) Spouses (also EDBs) must begin taking distributions on or before the later of:

 the calendar year following the calendar year in which the account owner died, or

 the end of the calendar year in which the owner would have attained age 73.

2. The ten-year rule: Designated beneficiaries (other than non-natural designated beneficiaries such as estates, trusts, and charities) who are not eligible designated beneficiaries are subject to the ten-year rule, which requires them to withdraw the entire amount by December 31 of the year containing the tenth anniversary of the owner's death (distributions during that 10-year period are allowed but not required unless the owner dies AFTER reaching the required beginning date. In such cases, designated beneficiaries must take RMDs in years 1 through 9, and liquidate the account no later than December 31 of the year containing the tenth anniversary of the original owner's death.) For example, if an owner died on January 1, 2021, which is before reaching the owner's required beginning date, a designated beneficiary must remove all assets from the account no later than December 31, 2031 but is not required to make distributions during the 10-year period. On the other hand, if the owner died on January 1, 2021, which is after reaching the required beginning date, the designated beneficiary must take RMDs during years 1-9 and remove all assets from the account no later than December 31, 2031.

3. The five-year rule: Non-natural designated beneficiaries (e.g., estates, trusts, charities) are subject to a five-year rule, requiring distribution of the owner's entire interest by the end of the calendar year containing the fifth anniversary of the owner's death.

When the owner dies AFTER reaching the required beginning date: Minimum distributions after the owner's death (for all years after the year in which death occurs) are available based on the remaining life expectancy of the eligible designated beneficiary. The EDB's remaining life expectancy is calculated using the EDB's age in the year following the year of the owner's death reduced by one for each subsequent year. However, the distribution period will never be shorter than the owner's life expectancy in the year of death.

The eligible designated beneficiary must also take a required minimum distribution for the year of the owner's death using the owner's age/life expectancy from the Uniform Lifetime Table. If the owner did not take this RMD prior to death, the EDB would generally receive it as income in respect of a decedent.

The eligible designated beneficiary can use his or her own life expectancy or the deceased owner's remaining life expectancy at death, whichever is longer, to calculate RMDs.

Election By Surviving Spouse

If the deceased owner designated the surviving spouse as beneficiary of the account, the spouse may elect to treat the account as her own IRA (we'll discuss this as appropriate to our later example of Tom and Debbie, in which the surviving spouse is female). The spouse accomplishes this by having herself designated as the new account owner.

For a surviving spouse to roll an account over into her own name, she must be the sole beneficiary of the account and must have an unlimited right of withdrawal. Before she can roll over the IRA, she must take the RMD for the year of her husband's death. If she has reached her own required beginning date, RMDs for the years following the year of death are determined by entering the Uniform Lifetime Table with her own age.

When a spouse is the sole designated beneficiary and decides not to roll over the IRA into her own name, and the owner dies before reaching his required beginning date, then the spouse may defer payments until the year the deceased owner would have reached age 73. Thereafter, required minimum distributions are calculated based on her life expectancy as measured by the Single Life Table. This process is repeated in each succeeding year. If the owner dies after age 73, the spouse must take the owner's required minimum distribution for the year of death if the owner dies before taking the distribution. Beginning in the year after the owner's year of death, the surviving spouse takes required minimum distributions based on her own life expectancy as calculated using the Single Life Table.

Let's look at an example. Tom died in 2025 at age 77, before taking his RMD for the year. Tom’s wife Debbie is his sole beneficiary. Tom’s account balance at the end of 2024 was $1,000,000, so his final RMD amounts to $43,668 ($1,000,000/22.9, which is the divisor from the Uniform Lifetime Table). This distribution is paid to Debbie. The following year, Debbie is 71. With a December 31, 2025, account balance of $1,050,000, Debbie takes the factor for age 71 from the Single Life Table (18.0) and calculates an RMD of $58,333 ($1,050,000/18.0).

No Living Beneficiaries

If the owner dies before the required beginning date without designating living beneficiaries of any type, the entire account balance must be distributed no later than December 31st of the year containing the fifth anniversary of the owner's death. If no beneficiary is named under the plan, state law governs the distribution of the account balance—generally, to the beneficiaries named in the participant's will or identified under state intestacy laws.

If the owner dies after reaching the required beginning date and if there are no living beneficiaries, the distribution period available is the owner's life expectancy based on the age in the year of death, reduced by one for each year thereafter. A required minimum distribution must be taken for the year of death based on the owner's age in the year of death using the Uniform Lifetime Table, and the remainder of the account must be distributed within five years.

Multiple Beneficiaries

The general rule when the account owner named multiple beneficiaries for post-death distributions (e.g., "I designate my spouse and child as beneficiaries of my IRA in equal shares") is that RMDs have to be based on the life expectancy of the oldest beneficiary. However, if the owner's account is split into separate accounts for each beneficiary, then each beneficiary can use his or her own life expectancy to compute RMDs. Some important points to remember:

 The beneficiaries must have separate interests as of the owner's death, even if the separate accounts are not established until later. A person cannot be an eligible designated beneficiary unless the person meets the eligibility requirements and is named as such beneficiary by the decedent. Single trusts must be divided into separate sub-trusts before the participant's death if the beneficiaries wish to use their own individual life expectancies; otherwise, the age of the oldest beneficiary will apply. However, for individual (non-trust) beneficiaries, as long as the separate shares are created by December 31 of the year following the participant's death, each beneficiary may use his or her own age [Ltr. Ruls. 200306008, 200306009, 200307095, 200308046].

 In settling the identity of the designated beneficiary, the separate accounts have to be established by September 30 of the year following the year of the owner's death. For example, if the owner's disabled child and a charity were named as equal beneficiaries of an IRA, separate accounts would have to be set up by September 30 of the year following the year of death. Otherwise, the result for RMD purposes would be that no beneficiary would be deemed to have been "designated" because of the charity's presence in the "beneficiary pool" (since the charity is an entity without a life expectancy).

 To determine the applicable distribution period, the separate accounts have to be established by December 31 of the year following the year of the owner's death. If separate accounts are not set up by then, the oldest eligible designated beneficiary's life expectancy would have to be used to determine RMDs for all of the beneficiaries.

Section 72(t) Payments

Individuals who are using the minimum distribution method to calculate their "substantially equal periodic payments" under IRC §72(t) can switch to the applicable IRS tables under the (see below) IRC §401(a)(9) regulations to calculate their payments. The IRS will not consider this change an impermissible modification that disqualifies the payments for IRC §72(t) treatment.

Roth IRA Beneficiaries

The RMD rules do not apply to lifetime distributions from Roth IRAs, but do apply after the owner's death. Roth IRA beneficiaries must pay the 25% excise tax for failure to comply with the RMD rules.

Designated Roth Account Beneficiaries

A provision in SECURE 2.0 removed the RMD requirement for designated Roth accounts, effective as of 2024. Before 2024, RMDs were required from these accounts. However, individuals who inherit a designated Roth account may be subject to RMDs, depending on their beneficiary statuses.

When RMD Exceeds Account Balance

If this year's RMD, based on last year's account balance, exceeds the current value of the account due to a precipitous decline in value of the underlying investments, the owner or beneficiary can avoid the 25% excise tax by withdrawing the entire account balance.

Reporting Requirements

IRA issuers, custodians, and trustees must:

 Notify IRA owners (but not the IRS) that a distribution is required under the RMD rules, and either report the amount of the required distribution or offer to compute the amount for the owners. For the time being, they do not have to report to beneficiaries of deceased owners.

 Identify (using IRS Form 5498) each IRA for which a minimum distribution is required. They are not required to report the amount of the required minimum distribution [Notice 2002-27, 2002-18 I.R.B. 814].

Annuity-Type Required Minimum Distributions

Final Treasury regulations on RMDs govern distributions from IRAs, defined contribution plans and defined benefit plans, and include rules related to payments in the form of annuities.

Let’s look at several items of note in those regulations:

Annuities Paid for a Period Certain. RMDs during the lifetime of a defined benefit plan participant generally can be made in the form of annuity payments for:

1. the life of the participant,

2. the joint lives of the participant and a beneficiary, or

3. a period certain that ends on or before the life expectancy of the participant or the joint life expectancy of the participant and a beneficiary (the period certain can be as long as the life expectancy period in the Uniform Lifetime Table that corresponds to the participant's age in the year in which the annuity starting date occurs).

The only exception is for a spouse who is the participant's sole beneficiary and is more than 10 years younger than the participant. Here, the period certain can be as long as the joint life and last survivor expectancy of the participant and spouse. Moreover, the required period is unchanged when the participant dies, even if the beneficiary's single life expectancy is shorter (or longer) than the remaining period certain.

Minimum Distribution Incidental Benefit (MDIB). Suppose an employee's (or IRA owner's) annuity starting date is before age 70. In this case, an adjustment is made to the age difference between the employee and beneficiary. For example, if the employee's annuity starting date is age 55, a joint and 100% survivor annuity can be paid to a surviving beneficiary who is not more than 25 (the usual 10 plus 15 additional) years younger than the employee.

Increasing Benefits. Permissible increases in benefits include:

 cost-of-living adjustments,increases due to a plan amendment,

 increases due to a plan amendment,

 increases ("pop-ups") due to the death of a designated beneficiary or the divorce of the employee,

 a return of contributions upon the employee's death, and

 increases under variable annuities.

Form of Distribution. The regulations permit certain prospective changes in the form of distribution. These include:

 a change to a qualified joint-and-survivor annuity upon the employee's marriage,

 a change upon the employee's retirement or plan termination, and

 a change to a life-contingency annuity from a period-certain annuity.

Payments to a Child. Payments to the employee's child may be treated as if the payments were made to a surviving spouse until the child reaches the age of majority. The age of majority may be extended if the child is otherwise an eligible designated beneficiary by virtue of being disabled or chronically ill. The payments must be payable to the surviving spouse after payments to the child cease.

Separate Accounts. Separate accounts under a defined contribution plan can be used to determine RMDs if they are established by the end of the calendar year following the year of the employee's death.

Commercial Annuity Contracts. IRAs and defined contribution plans can meet the RMD requirements by purchasing a commercial annuity contract from an insurance company, and Treasury regulations contain a number of examples to show how this can be done.

Naming Charity as Beneficiary

Naming a Charitable Beneficiary

IRAs and retirement plan assets are often used for charitable giving purposes, especially in light of the IRD advantages to the donor.

More Tax-Deferred Accumulation Inside the Account

Because the forced-out RMDs are now smaller in the early years after the required beginning date, the account balance may continue to grow for the ultimate benefit of charity (or individual beneficiaries) in spite of the RMDs taken out each year. For example, an account owner who earns an average annual return of 7% or more on the account will not reach the "crossover point"—when the RMD amount will surpass the average annual return—until age 86. If we change our assumption to a 6 percent average annual return, the crossover point would not be reached until age 83.

To see an illustration of the "crossover point" based on the Uniform Lifetime Table, click here.

The following table converts the factor from the Uniform Lifetime Table into the percentage of the account balance (as of December 31 of the preceding year) that must be distributed. These figures are rounded to two decimal places, so don’t rely on them for actual RMD calculations!

Uniform Lifetime Table Factors Converted to Percents
Age	Percent		Age	Percent
73	3.78		97	12.83
74	3.93		98	13.70
75	4.07		99	14.71
76	4.22		100	15.63
77	4.37		101	16.67
78	4.55		102	17.86
79	4.74		103	19.24
80	4.96		104	20.41
81	5.16		105	21.74
82	5.41		106	23.26
83	5.65		107	24.40
84	5.96		108	25.65
85	6.25		109	27.03
86	6.58		110	28.58
87	6.95		111	29.42
88	7.30		112	30.31
89	7.76		113	32.26
90	8.20		114	33.34
91	8.70		115	34.49
92	9.26		116	35.72
93	9.91		117	37.04
94	10.53		118	40.00
95	11.24		119	43.48
96	11.91		120	50.00

You can see that even a 90-year-old account owner has to take an RMD of only 8.20% of the remaining account balance.

So, not only are charities more likely to be designated as beneficiaries of IRA and qualified plan accounts, but in many cases there will be more remaining in the account for charity than under the prior rules.

Using Trusts to Limit Spousal Alteration

At a Glance

An account holder who is worried that the spouse may alter the beneficiary designation by removing or changing the charitable beneficiary may make use of a trust. A trust may offer several attractive ancillary benefits. Two types of trusts may be most helpful: QTIPs (Qualified Terminable Interest Property trusts) or CRTs (Charitable Remainder Trusts).

QTIPS

At a Glance

Qualified Terminable Interest Property trusts qualify for the marital deduction for federal estate tax purposes. QTIPs require that all income of the trust during the spouse's life be paid to the spouse. No other beneficiary may benefit from the trust during the lifetime of the spouse. The IRA beneficiary designation therefore would provide that the greater of the minimum required distribution or the income of the IRA account be paid to the spouse at least annually during the life of the spouse.

How QTIP Works

Under the QTIP arrangement, the first spouse to die would remain in control of the undistributed principal of the account, which, after the death of the surviving spouse, would go as the first spouse had directed. The value of such principal would be taxed in the estate of the surviving spouse, but the value of assets passing to charity would qualify for an estate tax charitable deduction.

If it is desirable to provide the surviving spouse with access to the principal of the trust prior to the eventual transfer to the charity, the QTIP can be drafted to permit such access. The value of the QTIP remaining at the spouse's death will be included in his or her estate; however, that value which is transferred to the charity will give rise to an estate tax charitable deduction.

Charitable Remainder Trust (CRT)

At a Glance

If a Charitable Remainder Trust (CRT) is used, either a fixed dollar amount (Charitable Remainder Annuity Trust) or a specified percentage (Charitable Remainder Unitrust) will be received at least annually by the non-charitable beneficiary or beneficiaries. After their interest terminates, the remaining assets will be paid to the charitable beneficiaries named in the trust.

At the time the original account holder dies and assets pass to the CRT, the value of the interest going to the surviving spouse will qualify for the estate tax marital deduction and the value of the charitable remainder interest will qualify for the estate tax charitable deduction. Any value of the IRA remaining inside the CRT at the death of the surviving spouse will not be taxable in his or her estate.

Advantages

Individuals wishing for the charity to have an interest that is clearly vested might prefer to establish a Charitable Remainder Trust rather than a QTIP. When the account balance is transferred to the CRT upon the account holder's death, there will be the estate tax charitable deduction for the value of the portion bequeathed to the charity. The account holder's estate will also be entitled to an estate tax marital deduction with respect to the spouse's income interest in the assets transferred to the CRT. Since the charity is income tax-exempt, there will be no income tax liability as a result of the transfer of the qualified retirement plan or IRA assets to the CRT.

Disadvantages

One problem may be the inflexible nature of the distributions to the surviving spouse. In a CRT, these will be either a certain percentage or a certain amount. If the surviving spouse has substantial other assets, however, such inflexibility may not be troublesome.

Children as Beneficiaries

When an account holder wishes to provide for his or her children through an IRA or qualified retirement plan, the use of a CRT may be in some cases more advantageous than an outright bequest of an asset to the child.

There are several reasons why. One is that a bequest to a CRT will create an estate tax charitable deduction, which will act to reduce estate taxes. Further, the transfer of the IRA to the CRT will not trigger immediate income taxation. Income generally will be taxed to the beneficiary of the CRT as it is received by him or her. A bequest to a CRT benefiting a child may be limited or made impracticable, however, by the requirement that at least 10% of the value transferred to the CRT must represent the charity's remainder interest.

When the IRA eventually passes to the charity following their deaths, assets will be lost to the family. However, the reduced income and estate taxation occasioned by the transfer to the CRT will have preserved additional principal in the IRA which will generate additional income for the non-charitable beneficiary. A part of this income may be used to replace the assets lost to the family by obtaining life insurance on the life of the child, or perhaps second-to-die life insurance on the lives of the child and the child's spouse.

Marital Property Rights

Internal Revenue Code Section 401 and the regulations thereunder provide that, for many types of qualified retirement plans, the automatic benefit provided must be a qualified joint and survivor annuity. To select another type of benefit, a qualified spousal waiver must be executed and notarized during the applicable election period.

These automatic benefit and spousal consent requirements do not apply to IRAs.

State community property or marital property laws may also affect the devolution of property held by spouses.

Transfers During the Donor's Life

Lifetime plan withdrawals by a donor may be used to fund charitable gifts. Such withdrawals may be used for direct gifts, or to establish a CRT. The charitable deduction created by the direct gift or by the creation of the CRT will reduce the income tax liability occasioned by the withdrawal, and, if there is a CRT, the account holder may receive payments from the CRT during his or her lifetime. Such payments might also be continued during the life of the donor's spouse.

The tax effects of an immediate gift would be to reduce the donor's taxable estate by the value of the transferred property and to give rise to an immediate income tax deduction for the present value of the gift to the charity (if the donor itemizes and subject to limitations).

Qualified Charitable Distribution from IRA Assets

The Qualified Charitable Distribution (QCD) from an Individual Retirement Account (IRA) permits a person over age 70½ to direct a charitable gift directly to a qualified charity from an IRA. A person may direct up to $111,000 per year in this manner (annual aggregate amount for 2026), but contributions made after age 70½ count against QCD amounts. The distributed amount is excluded from income so the taxpayer does not need to report the distribution as taxable income for federal tax purposes. Furthermore, the distribution counts toward the taxpayer's annual required minimum distribution for tax-deferred accounts if one is required. However, the distribution does not qualify for a charitable deduction.

The SECURE 2.0 Act introduced a life-income QCD option. IRA owners age 70½ or older can make a one-time, tax-free distribution up to $55,000 (in 2026) to create a new charitable gift annuity (CGA) or charitable remainder trust (CRT). The distribution does not qualify for a charitable deduction but it does count toward the donor's RMD if one is due. With either a CGA or a CRT, income payments are taxed as ordinary income and may only be made to the IRA owner and/or the owner's spouse.

Click here for a checklist of requirements for the direct QCD.

1. Donor must be at least 70½ when the distribution is ordered 

2. Distribution must be made from an IRA (either traditional or Roth, although there is no real advantage to be gained by making a qualified charitable distribution from a Roth)

3. Distribution must go directly to the charity from the account

4. Charity must be a public charity or private foundation that may receive general contributions [but not a Donor Advised Fund or a Sec. 509(a) Supporting Organization]

5. Distribution must otherwise qualify as a charitable income tax deduction

6. Distribution must otherwise be an entirely taxable distribution

7. Donor cannot exclude more than $111,000 as a qualified charitable distribution (annual aggregate limit)

Click here to read about the requirements of the life income QCD.

 Under SECURE 2.0 legislation, IRA owners age 70½ and older can choose to make a one-time, tax-free distribution up to $55,000 (in 2026) from an IRA to fund a new charitable gift annuity (CGA) or charitable remainder trust (CRT).

 The IRA distribution must go directly from the IRA to fund the new gift.

 There is no charitable income tax deduction allowed, but the distribution counts toward the donor's required minimum distribution (if one is due) and the donor owes no tax on the distribution.

 Spouses may each direct up to $55,000 from individually held IRAs to create one joint-life CGA or CRT (for a total of $110,000).

 The CGA or CRT may not make payments to anyone but the IRA owner and/or the owner's spouse.

 All payments are taxed at ordinary income tax rates.

 The income interest must be nonassignable.

 The new gift must generally have a minimum 5% payout rate.

 A CGA must be an immediate CGA (not a deferred CGA).

 A CRT cannot accept additional contributions and the trust term may not be limited to a term of years.

The prospect of making a direct distribution to charity without realizing the distribution as income is attractive to several types of potential donors:

1. Donors that do not need the added income and wish to avoid paying tax on their required minimum distribution

2. Donors that take a standard deduction rather than itemize (and so never benefit from a deduction for a charitable contribution)

3. Donors with an adjusted gross income at or near the level at which itemized deductions are phased out

4. Donors that live in states that do not provide a general deduction for charitable gifts

5. Donors that would otherwise be subject to the annual limit of 60% of adjusted gross income for deducting charitable gifts

Click here to see an infographic of how Qualified Charitable Distributions Work (Outright QCDs)

Click here to see an infographic of how Qualified Charitable Distributions Work (Life Income QCDs)

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