4 Smart Ways Retirees Can Give More to Charity

Retirement is a time when many people want to give back to their communities and support causes they care about. After years of hard work and saving, retirees often have the opportunity to contribute to charities in a meaningful way. However, without a good tax plan, many retirees end up paying unnecessary taxes, which takes away from the amount they can donate. Here are four smart strategies to help retirees give more to charity while keeping taxes at bay.

1. Turn Your RMD into a Tax-Free Gift

Once you turn 73, you are required to take annual withdrawals from your tax-deferred accounts; these are called Required Minimum Distributions (RMDs). Unfortunately, these withdrawals are taxed as regular income, which can push you into a higher tax bracket. This may lead to higher taxes on your Social Security benefits and increased Medicare premiums.

If you wish to support charities, consider using a Qualified Charitable Distribution (QCD). If you’re over 70½, you can make tax-free donations directly from your IRA to a qualified charity. This donation can count towards your RMD but will not add to your taxable income. The charity gets the full amount, and the IRS gets nothing!

You can make QCDs from different types of IRAs, like traditional IRAs and SIMPLE IRAs. However, you cannot use funds from a 401(k). If you’re married, both you and your spouse can make QCDs, significantly increasing your charitable contributions. Just remember, the money must go directly from your IRA to the charity—not to your bank account first.

2. Donate Appreciated Stock Instead of Cash

Have you held stocks or mutual funds for more than a year? Instead of selling them for cash and donating that money, you might want to donate the stock directly to a charity. Here’s the catch: When you sell stocks, you pay capital gains tax on any profits. But if you donate those appreciated stocks, you won’t face capital gains tax.

You can get a tax deduction for the full value of the stock at the time you donate it if you itemize your deductions. Generally, you can deduct contributions up to 30% of your adjusted gross income, and any excess can be carried over for up to five years. The charity can sell the stock without paying taxes on the gains, which means more money goes to the cause you care about.

If your chosen charity doesn’t have a brokerage account, many financial institutions can help facilitate the stock transfer.

3. Name a Charity as a Beneficiary of Your IRA or 401(k)

If you have a significant amount saved in a 401(k) or traditional IRA, you might be thinking of leaving it to your children or other loved ones when you pass. However, it could be more tax-efficient to name a charity as the beneficiary.

When a qualified charity receives money from a traditional IRA, it doesn’t pay taxes on that amount. In contrast, a non-spousal beneficiary like your child would have to pay ordinary income tax on withdrawals from the account. This could push them into a higher tax bracket, especially if they’re in their peak working years.

For example, if you leave ₹2 crores in an IRA to a charity, that charity receives the full amount to use. But if that money goes to a non-spousal beneficiary, taxes could take a significant chunk out of that gift. Therefore, naming a charity as a beneficiary could be a wise option.

4. Make an Impact with a Donor-Advised Fund (DAF)

Donor-Advised Funds (DAFs) are becoming popular for retirees thinking about charity. Established after the Tax Cuts and Jobs Act (TCJA), DAFs allow you to combine several years’ worth of donations into one large gift.

When you contribute to a DAF, it gets invested, allowing your money to grow tax-free until you decide to distribute it to a charity. You still have advisory privileges and can control where your donations go and when to give.

Setting up a DAF is relatively straightforward and is a great way to maximize your charitable contributions while reaping tax benefits.

Giving with Purpose and Smarts

While many people want to help others, not everyone thinks about how tax efficiency plays a role in charitable giving. Using the right strategies, you can make the most of your charitable contributions, ensuring you leave a lasting impact.

Consulting with a financial advisor can help you understand these options and find the right fit for your giving goals. After all, it’s not just about giving; it’s about giving smartly.

So, whether you’re donating your RMD, appreciated stocks, or setting up a DAF, each little effort counts in making the world a better place. Happy giving!

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Original Text – https://www.kiplinger.com/personal-finance/charity/smart-ways-retirees-can-give-more-to-charity