Charities Stand to Benefit From Trillions in Mandated Retirement Distributions

The same generation that sang along with Elvis, the Beach Boys, and the Beatles will be singing a different tune as they pay taxes on trillions in 401(k) and IRA required minimum distributions (RMD) this year.

In January, Edward Shane, managing director at Bank of New York Mellon, told the Wall Street Journal that he estimates boomers have roughly $10 trillion stashed away in tax-deferred savings accounts. As the first generation with 401(k)s, boomers are in a unique position to call their own tune as they decide what to do with that money. How can charities join the chorus and benefit from this potential windfall?

HBO's recent documentary Becoming Warren Buffett highlighted the homespun billionaire's pledge to give away the bulk of his wealth during his lifetime. Buffett is setting a new standard for philanthropy and — more importantly — is encouraging others to do the same. Not everyone is Warren Buffett, of course, but we can all learn from his philosophy of giving.

Boomers can make "giving while living" the norm

My parents, who are among the oldest of the boomer generation (born between 1946 and 1964), turned 70 last year. According to Pew Research, they are just two in a wave of 74.9 million boomers who will be reaching that milestone over the next decade and a half. Though only second in size (behind the millennials), the boomer generation is the wealthiest on record. That puts them in a position to give more than any previous generation.

My parents will mark another "first" this year when they hit the RMD age of 70½, meaning they will be required to withdraw monies from their retirement accounts (IRAs or other tax-deferred vehicles) or face steep penalties (50 percent of the amount not withdrawn). Of course, these distributions are taxable, and for some boomers they will represent unwanted income, which is where a proactive giving strategy comes in.

Boomers who want to establish a "giving-while-living" strategy (akin to Buffett's, in principle if not size) can take their RMD from their tax-deferred retirement savings plan and allocate those assets directly to a charity through a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from the trustee of an IRA to a qualified 501(c)(3) organization. There are other requirements: $100,000 is the maximum allowed per year, and the IRA or 401(k) holder must be 70½ or older.

The benefits of this type of planned charitable giving strategy are threefold. First, QCDs can satisfy the required minimum distribution. Second, QCDs are excluded from taxable income. And third, studies show that giving back can make you happier and feel more connected with your community.

What's more, this tax-planning strategy isn't going away. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made QCDs a permanent part of the tax code, and with the bulk of boomers approaching RMD age, they have an opportunity to make this type of proactive giving-while-living strategy the norm.

Recurring donations

There's a second tax-related opportunity for charities interested in creating a recurring stream of donations from boomers who would like to make their qualified charitable distributions by donating some or all of the value of their required minimum distributions from their IRAs. Among other things, this type of gift could help charities offset reduced giving and spending in the future stemming from a market downturn, and it could also provide the spark needed to offset the donor fatigue that hamstrings so many nonprofit fundraising campaigns.

Education is the key. Charities should reach out to their boomer donors and instruct them on their options. By assuming the role of teacher and showing boomers who are nearing their seventieth birthday how they can help provide funding for worthwhile causes (while securing tax benefits for themselves), charities can get the generation that used to "Sing Along With Mitch" to learn a new tune called "Giving While Living."

It could be sweet music to nonprofits everywhere.

Jaylene Howard is a director for Canterbury Consulting, an investment advisory firm in Newport Beach, California, that oversees $17.4 billion for foundations, endowments, and families. Founded in 1988, the company designs and manages custom investment programs aligned with its clients’ goals.