Using IRA Distributions to Fund a Gift of Life Insurance
Richard and Darlene Walter
Gifts of Life Insurance, Gifts of Retirement Plan Assets
On his 60th birthday, Richard Walter of Shickley, Nebraska, realized he had received a unique present; the 10% penalty for early withdrawals no longer applies to his IRA. However, any withdrawals from an IRA are still taxed as ordinary income. With these facts in mind Walter realized that his IRA may be the most advantageous asset he owned from which to make a charitable gift.
An example, using a taxpayer in the 25% tax bracket, demonstrates this:
- Contributions to an IRA are tax deductible, so a $500 deposit saves $125 in taxes, resulting in an after-tax cost of $375.
- Money inside an IRA grows tax-free, so at 7% interest the $500 deposit will grow to $1,000 in 10 years.
- A withdrawal of $1,000 from the IRA costs $250 in income taxes, but a $1,000 charitable gift will save $250 in taxes. Therefore, the after-tax cost of a $1,000 charitable contribution from an IRA is only $375!
“Once my wife, Darlene, and I realized our ability to make a gift from the IRA was at such a low cost we decided to go ahead and make a gift from the IRA,” explained Richard, the then owner of Walter Insurance Agency and Chair of the Shickley Community Foundation Fund, an affiliated fund of the Nebraska Community Foundation.
The Walters have taken this charitable gift plan one step further by gifting the ownership of an insurance policy on their lives to benefit the Shickley Community Foundation Fund. The Walters arranged that the charitable gift from their IRA will be used to pay the premium on the life insurance policy.
“The use of a life insurance policy allows Richard and me to make a much larger future gift to our hometown,” said Darlene Walter.
“By using the IRA and a life insurance policy we figure conservatively that we are going to make a future gift to our hometown of over $2,500 for every $375 from our IRA. That is a great way to make a difference in a community that means everything to us and our family. I hope other people consider doing the same
thing with their IRAs,” encouraged Walter.
