Charitable Giving in Retirement: How to Support Causes You Love While Seeking to Protect Your Nest Egg

Jeanne Tackett |
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When you reach retirement, it's not just about relaxing on a beach or spending time with family—many retirees also want to leave a lasting impact on causes they care about. Charitable giving can be a powerful way to do just that, while still ensuring that you pursue financial independence. However, balancing philanthropy and managing your nest egg requires thoughtful planning. In this post, we’ll explore strategies for charitable giving in retirement that allow you to support the organizations you love without compromising your financial well-being.

Why Charitable Giving in Retirement Matters

Many retirees view retirement as an opportunity to give back. After decades of hard work and accumulating wealth, it’s natural to reflect on the causes and organizations that have had a positive impact on your life. Charitable giving offers a way to leave a legacy and help support those causes long after you're gone.

But charitable giving is more than just about helping others; it can also provide personal benefits:

  • Fulfillment: Many retirees find deep satisfaction in knowing their wealth is being used for good.

  • Tax Benefits: Certain types of charitable donations can reduce your taxable income and minimize estate taxes.

  • Legacy Building: Through thoughtful charitable planning, you can leave a legacy that reflects your values and priorities.

However, while generosity is a virtue, it's essential to ensure that your philanthropy doesn’t jeopardize your own financial future. Let’s explore ways to give back while managing your nest egg.

1. Start with a Financial Plan

Before making any major decisions about charitable giving, it’s crucial to have a comprehensive financial plan in place. This plan should outline your:

  • Monthly expenses: Ensure your daily living needs are met without stress.

  • Healthcare costs: Factor in the potential for rising healthcare expenses.

  • Longevity considerations: Understand how long your savings need to last and account for inflation.

At Total Clarity Wealth Management, our advisors can help you assess how much you can afford to give while pursuing financial independence. This process often includes calculating how much income you will need throughout retirement, understanding tax implications, and reviewing your investment portfolio to determine liquidity.

2. Use a Donor-Advised Fund (DAF)

A Donor-Advised Fund (DAF) is a charitable giving vehicle that allows individuals to make a charitable contribution, receive an immediate tax benefit, and recommend grants from the fund over time. This is an excellent option for retirees looking to make a significant impact without giving away too much all at once.

Benefits of a Donor-Advised Fund:

  • Tax Deduction: Contributions to a DAF are tax-deductible in the year you make them.

  • Flexibility: You can recommend how and when the funds are granted, giving you control over your donations during your lifetime.

  • Growth Potential: Assets in the DAF can be invested, potentially increasing the value of your contributions over time.

For example, if you make a large contribution to your DAF during a high-income year (such as the year you retire), you can benefit from a large tax deduction while distributing the funds to charities over several years. Please note that once a donation is made, it cannot be retracted. Donors may also have limited control over the fund’s investments, and administrative fees can reduce the amount available for grants. Investing includes risks, including fluctuating prices and loss of principal.

3. Qualified Charitable Distributions (QCDs)

A Qualified Charitable Distribution (QCD) is another powerful strategy for charitable giving in retirement. It allows individuals aged 70½ or older to transfer up to $100,000 per year directly from their Individual Retirement Account (IRA) to a qualified charity, tax-free.

Benefits of QCDs:

  • Reduce Taxable Income: The amount of the QCD is excluded from your taxable income, which can help lower your overall tax liability.

  • Meet Required Minimum Distributions (RMDs): For individuals aged 73 and older, QCDs can be used to satisfy all or part of the required minimum distributions (RMDs) from an IRA. This allows you to support a charity while avoiding the tax hit associated with RMDs.

  • Direct Giving: The funds are transferred directly from your IRA to the charity, so you never receive the distribution as income.

This approach is particularly beneficial for retirees who may not need all the income from their RMDs and would rather use those funds to support their favorite causes. If you donate to many charities each year, the administrative tasks required for QCDs might be burdensome. In this situation, a Donor Advised Fund would be much easier logistically as you would only need to retain tax documents related to the fund. 

4. Consider Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is a sophisticated estate planning tool that allows you to support a charitable cause while providing you or your beneficiaries with an income stream for a certain period of time. After that period, the remaining assets in the trust go to your designated charity.

How a CRT works:

  • You transfer assets, such as cash, securities, or real estate, into the CRT.

  • The trust pays you (or a designated beneficiary) income for life or for a specified number of years.

  • At the end of the trust's term, the remaining assets go to the charity of your choice.

Benefits of a CRT:

  • Income Stream: You can receive income from the trust while still providing for your favorite charity.

  • Tax Deduction: You may receive a charitable deduction based on the projected remainder that will go to the charity.

  • Capital Gains Tax Savings: If you contribute appreciated assets (such as stocks), you may avoid paying capital gains taxes on the sale of those assets within the trust.

A CRT can be a great option for retirees who want to balance charitable giving with their need for a predictable income. You must bear in mind that a CRT is irrevocable, meaning it’s difficult to change and the donor can’t access the assets. A CRT also requires a large donation of assets to make sense, and once that donation is made, you will legally no longer have control of the assets in the trust.

5. Leverage Life Insurance for Charitable Giving

Life insurance can be an effective tool for charitable giving in retirement. By naming a charity as the beneficiary of your life insurance policy, you can make a significant donation without affecting your current cash flow.

Benefits of using life insurance for charitable giving:

  • Amplified Giving: Your charity receives the death benefit, which can be significantly larger than the premiums you pay during your lifetime.

  • Estate Tax Benefits: The death benefit is removed from your estate, which can help reduce estate taxes.

  • Flexibility: You can retain control of the policy during your lifetime and change beneficiaries if needed.

Some retirees choose to establish a new life insurance policy with a charity as the beneficiary, while others opt to transfer an existing policy. This strategy can allow you to support your favorite causes without drawing from your retirement accounts or savings.


6. The Role of Tax Planning in Charitable Giving

One of the key considerations in charitable giving is understanding how it will impact your taxes. Many charitable donations can reduce your taxable income, which is particularly important during retirement when you're likely drawing from tax-advantaged accounts like IRAs and 401(k)s.

Strategies for minimizing taxes while giving:

  • Bunching Charitable Contributions: By making larger charitable contributions in a single year, you may exceed the standard deduction and be able to itemize your donations. This is known as bunching.

  • Appreciated Assets: Donating appreciated securities (such as stocks) allows you to avoid capital gains taxes and deduct the fair market value of the asset.

  • Charitable Gift Annuities: In exchange for a gift, you receive fixed income for life. A portion of the gift may be tax-deductible.

Tax planning should be an essential part of your charitable giving strategy. By working with an expert advisor like Total Clarity Wealth Management, you can seek to ensure that your giving maximizes tax benefits while still supporting the causes you love.

Conclusion

Charitable giving in retirement doesn’t have to be an either-or decision between supporting causes you care about and protecting your financial future. With careful planning, you can strike a balance between philanthropy and financial security. Whether seeking to preserve donor-advised funds, Qualified Charitable Distributions, Charitable Remainder Trusts, or leveraging life insurance, there are numerous strategies that can help you give back while preserving your nest egg.

Our advisors can help you navigate the complexities of charitable giving in retirement. By incorporating these strategies into your financial plan, you can seek to ensure your generosity benefits both the causes you care about and your financial well-being.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 may result in a 10% IRS penalty tax in addition to current income tax.

Securities offered through LPL Financial, Member FINRA / SIPC.  Investment advice offered through Total Clarity Wealth Management, Inc., a registered investment advisor and separate entity from LPL Financial.