As a high-net-worth individual, your retirement strategy encompasses more than one-time decisions about how income should be distributed during your golden years. Keeping in mind that you may not need all of that income, nor do you want to pay taxes on all of it, charitable giving comes to the forefront. What does your retirement strategy look like with this in mind?
High-net-worth individuals have unique considerations when it comes to charitable giving, so this guide walks you through the impact that it can make on your portfolio.
How Does Charitable Giving Impact Your Retirement Strategy?
Giving is good for the heart and can make you feel like you are making a real difference for the causes that are near and dear to your heart. With a bit of planning, it can also be beneficial for your retirement strategy.
The first impact that it can have on retirement relates to your tax advantages. So-called “phantom income” from required minimum distributions might bump up your taxable income or put you in a new tax bracket. Even if you don’t actually need those funds in retirement, it can still have quite a substantial impact on your taxes.
Depending on your method, donating to charity affects taxes by providing deductions or allowing you to avoid capital gains taxes. Donate highly-appreciated assets to the charity of your choice, take the tax deduction of the fair market value, and never have to pay a dime toward the difference in value from when you purchased it to when it is sold.
All of this permits you to pass more to your heirs and the causes you care about—and less to the government.
You can also create a charitable legacy when planning your retirement strategy. Support the causes you care about in the here and now. Philanthropy can even bring your family closer together as you involve your loved ones and establish a legacy of giving that extends far beyond your own generation.
Core Approaches for a Charitable Retirement Strategy
All these benefits might make you realize that you need to be more generous with the causes you want to further. Fortunately, there are multiple philanthropic paths you can take to reach that goal, with retirement savings at the forefront of your mind. Here are some of the strategies you may use.
RMD and QCDs
The first and often the easiest strategy to implement is to directly transfer funds from your IRA to a charity. This is only available if you are 70 ½ years or older. The benefit of this is that the required minimum distribution you give away is pulled from the IRA, as required, but it is not counted as part of your taxable income. IRA money is taxed as ordinary income, so it is the best to give away.
Gifting Appreciated Stock
Another avenue you might explore is donating appreciated assets directly to charity. For example, many people will give long-term held stocks, mutual funds, and other assets to a charity or even a donor-advised fund (DAF). When you give this way, the charity reaps the benefit of the full value of the asset, and you avoid capital gains taxes.
Donor-Advised Funds
A donor-advised fund (DAF) is ideal if you have a single high-income year. You can contribute up to five years’ worth of giving in one year through a process known as bunching, or charitable bundling. For example, you might consolidate contributions in your last year of work or in the year you sell a profitable business. You get to take one massive tax deduction. Then, you distribute those grants to charities over time during your lower-income retirement years.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is another tool for giving appreciated assets. You will remove assets from your taxable estate and place them into a trust. From here, you (or your beneficiary) will receive an income stream for life. At the end of the trust term, the remainder (a minimum of 10 percent) will go to charities that you choose.
The benefit of a CRT is that it creates retirement cash flow in your golden years while providing a more immediate tax deduction for the year that you contribute to the trust. If you don’t need or want the cash flow immediately, you can defer it with a NIMCRUT.
IRA Beneficiary
Last but not least, you can name a charity as the partial or full beneficiary of your pre-tax IRA. As funds are distributed, your heirs would pay income tax on that IRA, but the charity pays nothing at all. If you are truly concerned about maximizing the impact of your donation, this is often the most tax-efficient asset to leave to charity. Make sure you don't make your estate the beneficiary, as this has terrible tax consequences even if your will ultimately directs it to charity.
Get Help from Magellan for Retirement Strategies
Planning for retirement is complex, and many paths can lead to drastically different outcomes. High-net-worth retirees tend to have more options available, which can help them maximize the money they pull from retirement savings accounts and the money they want to give to causes near and dear to them.
Magellan helps with both of these scenarios. We provide comprehensive financial, tax, legal, and estate planning under one convenient roof. Our experts are well-versed in charitable remainder trusts to help you make the most of your money.
Reach out to us today to book a consultation and see if CRTs are the right move for you!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.