Jim and Kate are moved by many charitable appeals. They give a variety of small contributions throughout the year. They have thought about giving more but are held back by two major concerns. First, they do not want to run out of retirement money themselves and become dependent on their children or social welfare programs. Second, they want to give the bulk of their inheritance to their children who could really use it.
Waiting to give charity until death has the advantage of giving the money when you no longer need it. The disadvantage of waiting is missing out on the joy of giving. Many people do some of both.
The choice between children and charity is to some extent a false choice. Consider some of the details of Jim and Kate’s situation.
Jim and Kate have two children and an estate worth approximately $500,000 – half investments and half equity in their home. They would really, really like some of their money to go to solve world hunger issues, particularly to benefit children. They have identified the charity that most closely matches their objectives.
Jim and Kate ask themselves the question, “What if our children were to inherit $200,000 each instead of their full share of $250,000? Would the $50,000 difference materially affect their lives?” They conclude that the $50,000 would not make much difference to the children. Jim and Kate realize that they have just effectively found $50,000 X 2 = $100,000 to benefit world hunger upon their deaths.
By far the most common approach to contributing to charity is to write a check or use a credit card to pay. However, there is an alternative approach that may have some tax advantages.
If your IRA permits it, you can set up a checkbook that draws against it. If you use those IRA checks to pay bills, they are deemed to be IRA withdrawals, fully taxed, and possibly subject to penalties and fees. But if those checks instead go to standard (501c3) charities, they are not. You can effectively use pre-tax dollars for your charitable giving.
Furthermore, if you are age 70½ or greater and taking your Required Minimum Distributions, then such charitable checks count towards your RMD. You have thereby reduced the rest of your RMD owed and saved some taxes.
You can use a comparable approach to making charitable contributions upon your death. If your estate contains both retirement and personally held investments, it matters which assets go to your children and which to charity. If the retirement money through its beneficiary goes to your family, it is taxed; if it goes to charity, it is not. So to some extent, the charitable contribution pays for itself through a reduction in taxes.
You should integrate this approach to charitable giving with your other planning. See a professional for details.
The author does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal, accounting and financial advisors before engaging in any transaction or taking any actions regarding the content discussed above.
If you have comments or questions, contact me at Mark@SeriousAboutRetiring.com