The Big Baby Boomer IRA Mistake


Attention wealthy baby boomers with no kids. If you’re nearing or past the age of 60, there’s one small update you can make to your IRA that will cost you nothing, have no impact on your personal financial well-being, and will probably feel pretty darn good. And I’ll give you two good reasons to do it.

Let’s assume that after working for many decades, you roll your 401(k) into an IRA, and name a friend or family member to be your primary beneficiary. You’re done, right? Not so fast. If your financial circumstances allow for it, the primary beneficiary of your IRA should probably be a charity, not a person. Here’s why.

Reason 1: They May Need It More

A person’s default beneficiary choice is typically one’s next of kin or loved one.  And if you have a partner or dependent who will need all of your family’s wealth to maintain a certain lifestyle, then a charity is probably better off as a secondary (contingent) beneficiary. For everyone else (especially single people and dual-income couples with no dependents), a few questions should be answered before you go with the default choice, especially if your family members don’t require the inheritance to thrive.

Will an inheritance, at this point in time or later, make that person’s life significantly better?  Who will get the money if your loved one doesn’t spend it, and are you okay if it passes to their own beneficiaries after they die? How would it feel to tell a favorite charity that you’re leaving them a large sum of money? If you decide that a charity is worthy of receiving at least some of your wealth at your death, and you own an IRA, you can easily make that happen.

Reason 2: They Keep More

Taxes will be owed on your IRA whether the money is withdrawn by you or a loved one who inherits it.  A charitable beneficiary, however, will not be subject to taxes. For example, if you leave an IRA worth $300,000 to charity, they get 100% of it. If you pass it to a financially successful nephew, he’d probably keep about 2/3 of it and the other 1/3 would go to the federal government for taxes.

Talk To Your Advisor and Tell Your Charity

Most nonprofits are afraid to ask an older donor for a bequest commitment, since it may come off as a touch aggressive to ask someone for their money once they die (heck, kids are scared to talk to their own parents about such things). Nonprofits are therefore left to educate their donors through newsletters and “planned giving” web pages and hope that, every now and again, a big gift shows up unannounced.

If you’ve hit your 60s decade, and don’t have someone else relying on your IRA money for survival, now’s a great time to see if a charity should receive some of it.  Your promise now will give the board some confidence and peace of mind about their future, and may even help them with their long-term strategic planning. They will probably honor you in some way for it, if that helps.

Hey, charities gotta plan too, you know?

Happy planning,