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  • 1.  Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 12:51 PM

    When a charitable 501c3 org is named as a beneficiary of a 401k plan, does the charitable org have to pay taxes on the distribution?  We just received a gift as a named beneficiary of a 401k and 30% was withheld for state and federal taxes.  The custodian tells me that taxes will have to get paid whether it's now through them or later if the executor fills out the proper paperwork to have the taxes that were withheld distributed to the charity.  The fact that we are a charity, makes no difference, all distributions to beneficiaries from 401ks are taxed. 

    Any input is appreciated. 

    Thanks!

    Michael



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    Michael Manning
    University of New England
    Mmanning6@une.edu
    ------------------------------


  • 2.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 12:57 PM
    You will want to chat with your CFO. But here's what Fidelity says about any retirement plan assets donated upon death:

    image.png
    John H. Taylor, Principal
    John H. Taylor Consulting, LLC
    2604 Sevier Street
    Durham, NC     27705

    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987




    Original Message


  • 3.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 01:05 PM

    Thanks, John.  The way the Fidelity rep explained it, it only applied to IRAs which I thought was weird.  He mentioned QCDs a few times in my call, but he specifically stated that distributions from a 401k are taxed, even for charities.  

    I'll reach out to my Business Office and see what they say. 

    Thanks again. 

    Michael



    ------------------------------
    Michael Manning
    University of New England
    Mmanning6@une.edu
    ------------------------------

    Original Message


  • 4.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 01:12 PM
    I read this to say all reteriment plan assets.

    Here's another reference that says the same thing:

    How to Leave Money to Charity

    Donating an IRA or other retirement plan monies to charity can be a tax-smart estate planning strategy. When done properly, charitable donations of tax-deferred retirement assets can reduce the amount of income taxes owed both by your estate and by individual heirs.

    • When you name a qualified charity as a beneficiary on your retirement plan, neither you, your heirs nor your estate have to pay income taxes on those assets gifted after your death.
    • Because qualified charities do not pay income tax, 100% of your gift will directly benefit the programs supported by your charity. A qualified charitable organization is a tax-exempt, non-profit business that meets the requirements of section 501(c)(3) of the Internal Revenue Code.

    John H. Taylor, Principal
    John H. Taylor Consulting, LLC
    2604 Sevier Street
    Durham, NC     27705

    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987





    Original Message


  • 5.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 01:15 PM
    Also, see page 14 of this brochure from TIAA:


    John H. Taylor, Principal
    John H. Taylor Consulting, LLC
    2604 Sevier Street
    Durham, NC     27705

    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987





    Original Message


  • 6.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-07-2024 02:40 PM
    A nonprofit does NOT pay taxes on 401K plans for which they are the named beneficiary. There may be some other issue going on here. For example, the plan may not allow a charity to be named as a beneficiary. In that case, 401k would pay out to the named beneficiary in the plan -- probably the spouse -- and that would be a taxable event. The 401k beneficiary process is outside of probate, and supercedes the provisions of the will. In this hypothetical case, the spouse is not obligated to contribute the remainder of the 401k funds at all. It is possible that the spouse, as the designated beneficiary, is instructing that the funds be forwarded to a nonprofit, but this does not prevent taxes from becoming due. 



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    Isaac Shalev
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    Original Message


  • 7.  RE: Beneficiary of a 401k Retirement Plan

    Posted 03-12-2024 10:46 AM

    Thanks everyone.  Our Business Office reached out to our auditors for advice and below is what they stated. 

    "Thanks for giving me a few days to follow up on this. I did a little research on my end and followed up/confirmed with (removed name) (copied) who works with clients in the employee benefit space. In short, the tax withholding appears to be correct. Without getting into a ton of details, there generally is mandatory tax withholding if a retirement fund is cashed out and the proceeds are then contributed to the charity. There are a few exceptions to this, but the lane is rather narrow. One such exception is if the amount in the retirement fund were to be first rolled into an IRA, but even there that's only allowed in limited instances.

    Without knowing more about the specifics of the donor's investment plan/giving strategy, we would have to assume that the tax withholding was correct and accurate.

    I hope this helps! Please let us know if you have any questions."



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    Michael Manning
    University of New England
    Mmanning6@une.edu
    ------------------------------

    Original Message


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