By Adam K. Wright, CFA®, CFP®
When it comes to financial and retirement planning, charitable giving is an important component of the legacy you may want to leave. Perhaps charitable giving is already a part of your financial plan, through a donor-advised fund or checks you send at year-end. But maybe you’re wondering if there are ways to give so that your dollars go even further. Or maybe you want to start giving and you are wondering how to start. Well, there are several ways you can make charitable contributions that go above and beyond merely cutting a check. Incorporating a charitable giving strategy into your retirement and investment plans may help do good, and save on taxes.
Let’s discuss three ways you can maximize your charitable giving as part of your retirement plan.
Discover All the Ways to Give
First, the more intentional you are with your charitable giving, the better. Donating to a charity can be personally fulfilling, but there are also tax benefits to be harnessed that financial planning can help you attain. For example, charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes. That being said, before simply writing a check to support your favorite charity, consider incorporating one of these giving strategies that could maximize your generosity.
1. Donor-Advised Funds (DAFs)
Donor-advised funds (DAF) are charitable giving programs that allow you to combine the tax benefits of giving with the flexibility to support your favorite charities.
Contributions to your DAF can provide a current year’s tax deduction, then be invested to grow tax-free. This may result in more dollars for the charity(ies) you support when you decide to grant them funds. A donor-advised fund allows you to contribute anything from cash to appreciated securities to real estate to life insurance. Depending on what you contribute, and how much, can help to lower your tax bill. If you donate cash, you typically receive an income tax deduction of up to 50% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair market value, up to 30% of your AGI.
Once the money is out of your hands and into your donor-advised fund, you don’t have legal control over it. But you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you recommend. According to the legal setup of these accounts, the organization that holds your DAF isn’t required to follow your “advice” but there’s an understanding that they will.
2. Gifting Your Required Minimum Distribution (RMD)
A simple example that takes advantage of tax benefits and minimizes your taxable income involves the required minimum distributions (RMDs) you are required by law to withdraw from your retirement accounts when you turn 72. But what if you don’t need that money for living expenses? Current tax law allows you to gift your RMD directly to a charity and avoid paying taxes on the distribution. Each taxpayer is allowed to send up to $100,000 of their RMD to charity each year. As far as combining retirement planning and charitable planning, starting QCDs can be a great strategy for you. Importantly, this can be a great strategy for those with sufficient income streams who don’t want to pay excessive taxes.
Qualified Charitable Distributions (QCD)
If you own an IRA, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving, even if you take the standard deduction. A QCD is a distribution made from your IRA account directly to your charity of choice. When a QCD is made, that amount is no longer counted as income, potentially lowering your taxable income. A QCD counts toward your required minimum distribution (RMD) too. There are several caveats to consider, however. First, you must be over the age of 70.5 for a QCD to count. Second, you cannot send a QCD to a DAF. It must go directly to a charity. Overall, using QCDs are wonderfully simple and straightforward for retirees to use to reduce taxable income and support their favorite causes.
3. Charitable Remainder Trusts
A charitable remainder trust (CRT) is a trust that not only provides an income stream but passes the remaining value to charities of your choice when you or your beneficiary dies. A CRT allows you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. Effectively, a CRT sends you a stream of lifetime income, and the leftovers go to charity. Usually you will receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself and paid taxes, and you even gain creditor protection for it. It also provides other important tax benefits like having the funds removed from your taxable estate at death. Unlike DAFs, you always have control of the trust. Your trustee manages the assets, but they must follow the instructions you have indicated and make changes per your direction. It’s important to note that CRTs are an advanced retirement planning concept and it is best to consult with a qualified adviser.
All of your charitable contributions can be filed with your taxes, qualifying you for certain tax deductions and reducing your overall tax bill. Make sure to always ask for a receipt any time you give a donation (cash or non-cash) and file it safely with the rest of your financial documents and with your financial professional. Once tax season arrives, bring your receipts and your paperwork to your CPA so you can get an accurate picture as to which tax deductions you qualify for. Always include a copy of your receipts with your tax forms as proof.
An important point, which we’ll also note in your first quarter tax mailer, is that custodians (like Schwab) do not claim to warrant the validity of charities you may send money to. So, if you do a QCD, be sure to tell your tax preparer. The 1099 tax form you’ll receive from Schwab will not account for any QCDs. It is up to you to tell your tax preparer how much of your RMD went to charity. If you don’t, you may not get the tax benefits you were expecting!
What Strategy Is Best for You?
Everyone’s circumstances are unique, so a cookie-cutter formula just won’t do. And depending on the current state of your financial portfolio and retirement plans, there may be other ways to maximize your charitable contributions even more. Our team at Wright Associates would be happy to meet with you to discuss your charitable giving strategy. Schedule a complimentary phone call to get started.
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.