Better Giving in your Golden Years

Regardless if you are exiting a business or retiring from an employer, many retirees are faced with the thoughts of “What’s next?”  After a lifetime of effort, figuring out the specifics of what to do with the remaining years can be challenging.

As retirees shift their focus to leaving a charitable legacy and making a lasting impact, strategic charitable planning is essential. Building a successful strategy shouldn't wait until you stop working. By using your near-retirement years to clearly define what you can afford to give and master the specialized financial tools available, you ensure your charitable giving is efficient and sustainable, benefiting both your favorite causes and your long-term financial health.

The maze of charitable planning

Qualified Charitable Distributions

One of the most prevalent giving tools available during retirement is to make a qualified charitable distribution (QCD) directly from an individual retirement account (IRA). The QCD (also known as a charitable IRA rollover) allows the holder to transfer funds directly from their IRA to a charity. It is estimated that billions of dollars are given each year through QCDs.

When one normally makes a withdrawal from an IRA, that dollar amount counts as taxable income. However , a QCD bypasses that concern. The IRA holder gets the full benefit of the gift value as a tax deduction. Of additional value, this action can reduce your adjusted gross income (AGI), which in turn lowers the taxes on your Social Security benefits,  possibly lower your Medicare premiums, and lower your overall tax bracket.

There are several specific requirements and restrictions for QCDs including:

• The donor must be age 70 ^½ or older

• Up to $108,000 can be give per person per year. For married couples, each spouse can give up to that amount.

• The amount must go to the charity directly from the IRA. The donor cannot make a withdrawal and then send the money. This would defeat the advantages of the QCD.

• The gift must go to a qualified charity. The dollars cannot be transferred to a private foundation, a donor advised fund nor a GoFundMe campaign benefiting an individual or a family.

QCDs and RMDs

When an IRA holder reaches age 73 ( or 75  if born in 1960 or later), they must take a required minimum distribution (RMD) each year. These withdrawals are mandatory and taxable. When a QCD is made, this counts toward the RMD.

Donating Appreciated Stock

A retiree can donate appreciated stock or mutual funds that they have held over a year to charity. This action provides a double tax benefit:

-Capital Gains Tax Avoidance: The donor avoids a capital gains tax on the appreciated value of the given stock.

-Income Tax Deduction: You can deduct the full fair market valuation of the stock on the date that you make the transfer.

The stock the donor chooses to donate ideally should have a low cost basis which in turn means that a high appreciation has occurred. In the event that a stock has decreased in value, the donor should sell the stock first, claim the capital loss on their taxes, and then donate the cash.

Donor Advised Funds

A donor advised fund (DAF) is essentially a personal charitable savings account administered by a sponsoring public charity. Donors deposit assets (like cash or stock) into the fund, claiming an immediate tax deduction. While the assets can be invested for tax-free growth, they can never leave the DAF unless distributed as grants to qualified charities. This structure gives the DAF holder (the donor) the flexibility to separate the timing of their tax deduction from the timing of their charitable gifts.

A DAF provides the opportunity for a future retiree to plan their giving. They can set aside dollars in their income earning years and grant out from their fund. A DAF allows the concept of charitable “bunching” or “stacking” to occur. A DAF allows a donor to gain an immediate tax deduction at the moment the gift is made and then space out their granting during their retirement years.

Another value of this process can be the charitable contribution carryover. Depending upon the size of your gift, you may experience limitations due to your Adjusted Gross Income (AGI) as to how large your tax deduction can be in one year. This process allows you to carry-over your deduction up to the next five consecutive tax years. For a retiree, this can blend future giving with savvy tax planning.

Conclusion

Deciding how to plan your future giving can be a complicated process. Determining how you can afford the generosity that you want to have requires thoughtfulness. At Generosity Nexus, we are able to work with your existing advisors and tax planners  to bring our deep wisdom and real world expertise to help guide you on the path and giving vehicles that makes best sense for you.

Don’t hesitate to schedule an appointment to learn more about how we can help you.