The Church IRA

“Repay to Caesar what belongs to Caesar and to God what belongs to God.” – Matthew 22:21

What happens with our IRAs and other retirement accounts when we die? Early in our financial journeys, it is incredibly important to plan for our retirement accounts to take care of our loved ones, particularly spouses and younger children. Those concerns should be the primary drivers of the planning for our retirement accounts early on.

But what about later in our lives, when our financial futures are secured and our children are adults? 

I believe it is time to be intentional about the destination of our tax deferred retirement accounts. It’s great to provide for adult children. But how much? And couldn’t retirement accounts help better the world? As discussed below, the Church IRA is a way to give wealth to adult children and to the Church. 

The Origins of an Idea

In August 2023 the combination of a West Coast hurricane and the Podcast Movement conference resulted in my flying to Denver, Colorado on a Saturday to ensure I could attend the conference. As a result, I attended Sunday Mass far from home at St. Gianna Beretta Molla Church in Denver. At that Mass, the homilist, Deacon Steve Stemper, had an idea that spoke to me: treat the Church as one of your children in your estate plans.

The Church IRA

As frequent readers of the blog know, I’m quite interested in tax-advantaged retirement accounts. The idea to treat the Church as one of your children in your estate strikes me as particularly well suited for traditional IRAs.

Let’s illustrate with an example:

Chuck and Joy are married and both are 85 years old. They have a $3M traditional IRA in Chuck’s name, and they have three adult sons: Abe, Barry, and Charlie, in their late 50s and early 60s. 

Obviously, if Chuck dies, Joy needs support. Why not name Joy as the primary beneficiary of the traditional IRA? That leaves a remaining question: who should be the secondary beneficiaries? 

Each of Abe, Barry, and Charlie could be a one-third secondary beneficiary. At the second death, they would get about $1M each. What if instead Chuck names each of Abe, Barry, and Charlie one-quarter secondary beneficiaries (about $750K each) and names his Catholic parish or diocese as a one-quarter secondary beneficiary (also about $750K)?

This is the beginning of what I refer to as the Church IRA.

How much different will Abe, Barry, and Charlie’s lived experience be by inheriting a $750K traditional IRA instead of a $1M traditional IRA?

Further, the “hit” to Abe, Barry, and Charlie is likely to be less than a 25% reduction. Why? Because of taxes!

Each of Abe, Barry, and Charlie will have 10 years to drain the inherited IRA. Odds are they will want to take more than 10% per year from the IRA to manage a potential “Year 10 Tax Time Bomb.” Say Abe is single and otherwise has annual income of $150,000.

If Abe takes 12.5% of the account in the first full year after death, he takes $125,000 if he inherits a $1M traditional IRA. Assuming he takes the standard deduction, Abe will be in the 35% marginal tax bracket. 

If, instead, Abe inherits a $750K traditional IRA, he only takes $93,750 in the first year. With the other $150K of AGI, Abe will find himself in the 32% marginal tax bracket. 

The $31,250 that the Church IRA costs Abe during the year would have been taxed at 32% and 35% federal income tax rates. This illustrates that reducing Abe’s inherited IRA by 25% is not likely to cost him 25% of the after-tax wealth since it is likely he would pay a significantly higher tax rate on those last dollars. 

You could say Chuck and Joy “took” money from Abe, Barry, and Charlie by employing the Church IRA. The money they took from Abe, Barry, and Chuck and gave to the Church is the highest taxed money, making the Church IRA tax efficient. 

The Church IRA and the Owner’s Needs

One of the advantages of the Church IRA is it need not risk the owners’ own retirement sufficiency. Joy has a legitimate interest in her own financial future. The initial Church IRA structure has the advantage of reducing Chuck and Joy’s ability to fund the remainder of their own lives in no way. The Church gets money only after they have both passed. 

Church IRA Implementation

To my mind, the biggest question here is whether to create the Church IRA during our lives or at death. In Chuck and Joy’s case, assuming they want to, at a minimum, employ the Church IRA at death, there are three options:

PATH ONE: Keep everything in a single IRA during their lifetimes. Have the four equal secondary beneficiaries.

PATH TWO: Split the single IRA into four IRAs, each with its own 100% secondary beneficiary (Abe, Barry, Charlie, and the Church IRA)

PATH THREE: Split the single IRA into two IRAs (one worth $2.25M with Abe, Barry, and Charlie as the secondary beneficiaries and a second IRA worth $750K with the Catholic Church as the sole secondary beneficiary).

One of the advantages of the second and third paths is the Church IRA can serve additional purposes. One additional Church IRA purpose is that it be used during Chuck and Joy’s lifetimes to make their routine contributions to the Church (whether that be weekly or monthly). Those contributions can be made through qualified charitable distributions (“QCDs”).

QCDs are a great tax planning tactic during one’s own lifetime for the charitably inclined. They get money out of a traditional IRA tax-free and count against required minimum distributions (“RMDs”). 

Regardless of the chosen path, the Church IRA can also be used during Chuck and Joy’s lifetime to help them fund their own living expenses.

We see that the Church IRA can be simply used at death through beneficiary designation forms. Or the Church IRA can also work during one’s own life to either or both (i) provide for routine lifetime Church donations (preferably through QCDs) and (ii) provide for the owner’s own living expenses. 

Splitting IRAs

IRA owners can work with their financial institution to split an existing IRA into two or more IRAs. This can be done for any reason. Perhaps it’s simply for mental accounting to facilitate a Church IRA like the one in Paths Two and Three described above. 

One does not need to split IRAs to facilitate the Church IRA (see Path One above). But there can be simplicity advantages to having each beneficiary have their own separate and distinct IRA they inherit separate from other siblings and/or the Church. 

RMDs from Split IRAs

Here the tax rules are quite flexible. The tax rules treat all of one’s traditional IRAs as a single traditional IRA for RMD purposes. So Chuck and Joy would have tremendous flexibility in terms of which IRA or IRAs to take their overall RMD for the year from. They could take the RMD from the Church IRA or from one or more of the non-Church IRAs, or they can split it among their various IRAs however they want to. 

Changing Beneficiaries at the First Death

In Chuck and Joy’s situation, there is an important additional consideration. What if Chuck dies first? Joy would inherit the traditional IRA. She would then need to work with the financial institution to appropriately roll the inherited IRA into an IRA into her own IRA.

From there, she should name primary beneficiaries in accord with her Church IRA intention. She has the three paths described above as possibilities for structuring her Church IRA. 

Roth Versus Traditional

Absent incredibly rare circumstances, the Church IRA should be a traditional IRA. Roths are tax-free to individual beneficiaries. Traditional IRAs are taxable to individual beneficiaries. If your adult children are getting some and the Church is getting some, why not leave Roths to the adult children and some or all of the traditional IRAs to the Church? 

The adult children pay income tax and the Church does not. Why waste the tax-free attribute of the Roth on a tax-free entity, the Church? The Church does not benefit from Roth treatment while the adult children do. 

Perhaps the beneficiary designation forms split the Roth IRA only among the adult children and split the traditional IRA among the adult children and the Church, and leave a greater percentage of the traditional IRA to the Church. 

Conclusion

The Church IRA can flexibly leave a share of one’s financial wealth to the Church or other 501(c)(3) charity. It can help us repay to God what is God’s while reducing what is owed to Caesar.

To determine whether the Church IRA is appropriate for us, we need to ask ourselves several questions. How much do my adult children need? Should I leave a significant amount to my Church or other charities? Are there tax-efficient ways to provide for both the Church and my adult children?

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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.