In previous blogs we’ve discussed both how to approach charitable giving and strategies to maximize charitable giving in various seasons of life and giving levels.
In this article, we are sharing the story of putting this into practice through a recent financial plan we worked on.
Client Profile
This couple is in their mid-60s, and through financial planning has done a great job of funding various “buckets” in retirement, allowing them to structure both their withdrawals and charitable giving in a tax-efficient manner. (For more on structuring retirement assets in buckets, see our article here). They are charitably minded, giving to their church as well as a few local and international organizations/causes they are passionate about.
The Situation
Several years ago, while still working, we proposed the use of a donor advised fund to prepare for giving post-retirement. They had been giving to charity, roughly $50,000 per year, and wanted to continue that beyond their last paycheck. We spent the final three years of their working careers funding a donor advised fund. This strategy meant they were itemizing taxes in their highest earning years, resulting in a nice tax break when compared to giving immediately after retirement. The gifts into the donor advised fund also happened to be from highly appreciated stock they had acquired over time. Giving highly appreciated stock allowed for diversification away from a concentrated stock position they held, as well as minimizing future capital gains taxes.
For several years, this donor advised fund has operated exactly as it was intended, allowing them to give to their target without pulling from their other retirement assets. As we looked ahead through the lens of their financial plan, we recognized that the donor advised fund would carry them a couple more years but would be fully depleted when they reached age 68.
Over the 5 years since the last gift of highly appreciated stock, other holdings in their investment account have grown and would now be considered highly appreciated stock. They asked about making another 5-10 years of investments into the donor-advised fund. By diving into their financial plan, we explained their current income, taxable deduction limitations, and the upcoming ability to do Qualified Charitable Distributions. Through this planning conversation, we were able to formulate a gifting strategy to optimize their tax situation.
Our Recommendations
We recommended a $100,000 contribution into the donor advised fund this year, sourced from the investment that had significant appreciation over the past 5 years. This $100,000 figure provided sufficient funds to cover the next two years of giving. This strategy, called bunched giving, allowed them to itemize taxes this year while taking the standard deduction next year. It also resulted in lowering their taxable income sufficiently (remember, they aren’t working, and they are deducting $100,000 of charitable gifts). This lower taxable income provided an opportunity for us to maximize their Roth Conversions this year, a multi-year goal that we’ve been working to complete before Required Minimum Distributions (RMDs) and before the potential sunset of the Tax Cuts & Jobs Act (TCJA) in 2026 (at which time federal income taxes are slated to shift higher for most tax brackets).
Finally, we cautioned against funding more than 2 years, knowing there is opportunity for Qualified Charitable Distributions (QCDs) once they turn 70.5. They have sufficient pre-tax IRA funds and would like to be able to give this to charity, effectively making a tax-deductible gift without the need to itemize their taxes. We’ll revisit this with the client in the next couple years to shift their giving strategy from their Donor Advised Fund to Qualified Charitable Distributions.
All said, the client was able to address the following goals:
- Set aside funds earmarked for charitable giving over the next couple years.
- Lower their taxes over the next two years thanks to charitable gift bunching, which maximizes both itemized and standard deductions over a two-year period.
- Get more money to Roth IRAs from Traditional IRAs, while in a low tax bracket.
- Set the stage for the next phase of charitable giving through Qualified Charitable Distributions, which further will lower the long-term tax bill during their lives and the lives of their beneficiaries.
All of this was possible by using multiple charitable giving, tax, and financial planning strategies brought to light through a comprehensive financial plan. Forward thinking and strategic planning allowed them to maximize giving, minimize taxes, and establish a strong future financial position.
If you’re interested in learning more about how a financial plan could help you pursue your financial and charitable goals, please reach out to info@impactwealthplanners.com.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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.
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