Can a Charity Be a Beneficiary of an IRA?

An Individual Retirement Account (IRA) can be a significant part of an individual’s assets, and its distribution after death is a component of estate planning. A common question that arises is whether a charitable organization can be named as a beneficiary. The answer is yes; naming a charity as an IRA beneficiary is a permissible and popular strategy for those who wish to support a cause they care about. This approach not only fulfills philanthropic goals but can also offer tax advantages.

Tax Implications of Naming a Charity

Designating a charity as an IRA beneficiary provides distinct tax advantages, primarily concerning income and estate taxes. Because qualified charities are tax-exempt organizations under Internal Revenue Code Section 501, they do not pay income tax on the distributions they receive from an inherited IRA. This means the full value of the IRA can be transferred to the organization, maximizing the impact of the gift.

This contrasts with a non-spouse individual, such as a child, who inherits a traditional IRA, as they must pay ordinary income tax on any distributions. For an heir in a 24% federal tax bracket, a $100,000 IRA distribution would result in a $24,000 tax liability, while a charity would receive the entire amount tax-free.

Beyond income tax, naming a charity can also reduce or eliminate estate taxes for individuals with large estates. The total value of the IRA is included in the decedent’s gross estate, but the amount passing to a qualified charity is fully deductible. This deduction can lower the overall value of the taxable estate, potentially bringing it below the federal estate tax exemption threshold, which is $13.61 million per individual for 2024.

Naming a Charity as the Sole Beneficiary

When an IRA owner leaves the entirety of their account to a single charitable organization, the process is direct. The first step is to obtain the correct beneficiary designation form from the financial institution that holds the IRA. This form is the controlling document for the distribution of IRA assets upon death, superseding any instructions left in a will or trust.

To complete the form, the IRA owner will need to gather specific information about the chosen charity, including its full legal name, official mailing address, and its Taxpayer Identification Number (TIN). This information must be entered accurately on the beneficiary designation form.

Once the form is filled out with the charity’s details and the designation is set to 100%, it should be signed and submitted to the IRA custodian. It is advisable to keep a copy of the completed form and periodically review beneficiary designations to ensure they remain aligned with one’s current wishes.

Naming a Charity as a Partial Beneficiary

A more complex situation arises when an IRA owner wishes to leave a portion of their account to charity and the remainder to individual beneficiaries. This scenario requires careful planning to avoid negative tax consequences for the human heirs. If a charity, which is considered a “non-designated beneficiary,” is named alongside individuals on the same IRA, it can force the individual beneficiaries into a less favorable, accelerated distribution schedule.

Under the SECURE Act, most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. The presence of a non-designated beneficiary like a charity could trigger an even faster payout requirement, such as the five-year rule. This compression of the distribution timeline can accelerate the income tax liability for the individual heirs.

The solution is to properly structure the beneficiary designation by splitting the IRA. By creating separate shares for each beneficiary on the designation form, or by dividing the single IRA into separate inherited IRAs after death, the charity’s status does not impact the other beneficiaries. This separation must be completed by September 30 of the year following the IRA owner’s death. This action isolates the charity’s portion, allowing it to be paid out directly, while the individual beneficiaries can utilize the 10-year distribution rule.

The Post-Death Distribution Process

Once the IRA owner has passed away, the responsibility shifts to the designated charitable beneficiary to claim the assets. The charity initiates the process by contacting the financial institution that serves as the IRA custodian. The organization will need to provide official documentation to prove its claim, which includes a certified copy of the IRA owner’s death certificate.

In addition to the death certificate, the charity will be required to submit proof of its tax-exempt status, typically a copy of its determination letter from the IRS. The custodian will also require the charity to complete its own set of claim forms to process the distribution.

After the custodian receives and verifies all the required documents, it will process the distribution of the IRA assets. For a charitable beneficiary, this is done as a direct, lump-sum payment of the full designated amount. A charity cannot open an IRA account and must receive the funds directly, and the assets pass outside of the probate process.