Why You SHOULDN’T Leave Your Roth IRA to Charity
By Jeffrey Levine, IRA Technical Expert
Follow me on Twitter: @IRAGuru4EdSlott
As part of your estate plan, you may be considering leaving some of your assets to a charity. This is a fairly common part of many estate plans, and is often shaped by one’s experiences during life. For example, those who have suffered from cancer – or who have watched a loved one suffer from the disease – are more inclined to support cancer-related charities. Those who have been impacted by Alzheimer’s disease are more likely to support that cause as part of their final wishes. And so on…
Certainly, leaving money to a charitable organization as part of your last request is commendable no matter how you decide to go about doing so. That said, if you’re going to do it, you should do it wisely.
In that regard, and although there are always differences from person to person, as a general rule of thumb, you should not leave your Roth IRA to a charity if you have other sources available. Remember, if you have money in a Roth IRA, it means that you have already paid the income tax on most of those funds.
In some situations, it’s very clear which assets you should leave to charity and which assets should be left to other beneficiaries. For instance, if you have $100,000 in a traditional IRA and $100,000 in a Roth IRA, and you want to leave $100,000 to charity and $100,000 to other heirs, the choice is simple. Leave the $100,000 traditional IRA to charity, which would get it income tax-free thanks to its tax-exempt status, and leave the Roth IRA to the other heirs.
In other situations, however, it’s not quite as clear. For instance, suppose you have $100,000 in a brokerage account and $100,000 in a Roth IRA account. In general, both of these accounts could be inherited by a beneficiary income tax-free but, even in this case, the Roth IRA would make the better account to leave to your non-charity beneficiaries. Remember, in general, it’s not only what’s in the Roth IRA on the day you die that will be income tax-free to your heirs, but the future growth on those amounts as well. In contrast, while the value of your brokerage account on the date you die may be received by a non-charity beneficiary income tax-free (thanks to a step-up in basis), any future interest, dividends, capital gains, etc. would generally be taxable.