Naming a Charity as an IRA Beneficiary

Designating a charity as the beneficiary of an Individual Retirement Account (IRA) is an estate planning strategy that combines philanthropic goals with financial management. This approach allows individuals to support a cause they care about while offering a tax-efficient method for transferring assets. For those with charitable inclinations, using an IRA for this purpose provides a direct path for retirement savings to benefit a chosen organization.

Tax Implications of Naming a Charity

The primary tax benefit of naming a charity as an IRA beneficiary stems from the charity’s tax-exempt status. When a qualified charitable organization receives a distribution from a traditional IRA, it does not pay income tax on the funds. This is a notable advantage compared to when a non-spousal individual, such as a child, inherits a traditional IRA, as they must pay ordinary income tax on any withdrawals.

This makes a traditional IRA one of the most tax-efficient assets to leave to a charitable cause. By strategically leaving pre-tax IRA funds to the tax-exempt charity and post-tax assets to individual heirs, an individual can create a more favorable outcome for all beneficiaries. This method preserves other assets for heirs that do not carry the same income tax liability.

From an estate tax perspective, the value of the IRA is included in the decedent’s gross estate. However, the amount bequeathed to a qualified charity is eligible for an unlimited estate tax charitable deduction. This deduction cancels out the value of the IRA for estate tax calculation purposes, which can be beneficial for individuals whose estates are near or above the federal estate tax exemption threshold.

Methods for Naming a Charity as Beneficiary

The most direct method for naming a charity as an IRA beneficiary is through the IRA’s beneficiary designation form. This document is provided by the financial institution that acts as the custodian for the IRA. The account owner must request this form and complete it with precise information to ensure their wishes are carried out correctly.

When completing the form, the IRA owner must provide the charity’s full legal name, its official address, and its Taxpayer Identification Number (TIN). Using a shortened name or an incorrect TIN could lead to a distribution to the wrong organization. It is best to contact the charity directly to obtain this information and inform them of the intended gift, as the IRA custodian is not obligated to notify the charity upon the account owner’s death.

IRA owners can also choose to split the beneficiaries, leaving a percentage to a charity and the remainder to individuals. To protect the tax-deferral benefits for the individual beneficiaries, it is recommended to create separate accounts for the charitable and individual portions. If the assets are not separated by December 31 of the year following the owner’s death, the presence of a non-person beneficiary could accelerate the distribution timeline for the individual heirs.

For more complex situations, establishing a trust, such as a Charitable Remainder Trust (CRT), is another option. In this arrangement, the IRA assets are transferred to the trust upon death. The trust then pays an income stream to individual beneficiaries for a set period, with the remaining assets passing to the charity afterward. This method is more complex and involves legal and administrative costs.

Post-Death Distribution Rules for Charities

Once the IRA owner passes away, specific rules govern how and when the designated charity must withdraw the funds. As a non-person beneficiary, a charity is subject to different distribution timelines than most human beneficiaries. The specific timeline depends on whether the original IRA owner had started taking Required Minimum Distributions (RMDs).

If the IRA owner died before their required beginning date for RMDs, the charity is subject to the five-year rule. This rule mandates that the entire balance of the inherited IRA must be distributed to the charity by the end of the fifth calendar year following the year of the owner’s death. The charity can take the full amount as a lump sum at any point within this five-year window.

This timeline contrasts with the rules for most non-spousal human beneficiaries established by the SECURE Act. These beneficiaries are subject to a 10-year rule, which requires the account to be fully distributed by the end of the tenth year following the owner’s death.

If the IRA owner had already begun taking RMDs before their death, the distribution rules for the charity can change. In this scenario, the charity must take distributions over the deceased owner’s remaining single life expectancy, as calculated in the year of death.

An Alternative Strategy Qualified Charitable Distributions

An alternative to naming a charity as a beneficiary upon death is to make charitable donations from an IRA during one’s lifetime through a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from an IRA to an eligible charitable organization. This strategy is available to IRA owners who are age 70 ½ or older and offers a distinct set of tax advantages that are realized during the donor’s life.

The primary benefit of a QCD is that the amount distributed is excluded from the donor’s adjusted gross income (AGI) for the year. By lowering AGI, a QCD can help reduce taxes on Social Security benefits and potentially avoid higher Medicare premiums. For IRA owners who are age 73 or older and subject to RMDs, a QCD can be used to satisfy all or part of their annual RMD requirement.

The annual limit for QCDs is adjusted for inflation. For 2025, an individual can distribute up to $108,000. A married couple could each make a QCD from their separate IRAs, for a potential total of $216,000. To execute a QCD, the IRA owner must instruct their IRA custodian to transfer the funds directly to the qualified charity; the donor cannot receive the distribution first.

This lifetime giving strategy provides an immediate tax benefit and allows the donor to see their philanthropic contributions at work. It is a tax-efficient way for charitably inclined retirees to support causes they care about while managing their own income tax liability.