When you think of your retirement plan, what comes to mind first? The amount in your IRA? The dread of capital gains taxes? Maybe even the executor of your estate?
The first thing that came to mind probably wasn’t giving your hard-earned money away.
But what if we told you that making a charitable giving plan can lead to a more fulfilling retirement? The sooner you start giving in retirement, the more your money will have time to grow and serve the people and causes who need it most.
Charitable planning can make a generous retirement possible. The right plan can help you pursue a generous retirement from day one. In this blog, we’ll explain what charitable planning is and explore its impact on your finances and your community. We’ll even provide some tips to help you get started.
What is Charitable Planning?
Charitable planning is a combination of different strategies that create a tax-efficient charitable giving plan. It takes generosity a step further and makes it strategic.
In your working years, you may have written the occasional check or donated cash to nonprofits in need. You may have even automated giving to your church or a ministry dear to your heart. Charitable planning goes beyond simply giving out of your income—all while maximizing your impact.
Charitable planning is especially beneficial for both you and the causes you care about. It frees up resources for nonprofits to do important work. It also brings you joy! Imagine being able to give regularly to ministries, churches, and other life-giving organizations—even long after you’re gone. The sooner you make a plan, the more your generosity can compound over time.
Who is Charitable Planning For?
Charitable planning is for everyone. At Generous Wealth Advisors, we ask every person who walks through our doors about their charitable giving plan, from what nonprofits they currently support to other ways they would like to be generous.
Whether or not you’re close to retirement age, you can start planning now. Even if you are starting your plan before your retirement years, you don’t have to give from your income. In the next section, we will look at different forms of charitable giving that you can build into your plan.
Types of Charitable Giving
Many people’s initial assumption about charitable giving is that it only involves cutting a check to an organization in need. Fortunately, it can go far beyond that! You have several options available to you, including accounts and trusts you can set up before you even retire. Here are some common charitable giving options we recommend to our clients:
- Donor-Advised Funds: A donor-advised fund (DAF) is simple to set up. With a DAF, you can recommend which charities your money will go to and make an impact for causes you care about. You can contribute to these funds over time. These funds can offer tax advantages of up to 60% of adjusted gross income. You can contribute either cash or non-cash assets to donor-advised funds (like stocks, bonds, and mutual funds.)
- Foundations: Setting up a private foundation is a bit more involved than a donor-advised fund. A private foundation is fully funded by an individual, family, or corporation, which receives a tax deduction for their contributions. A private foundation requires 501(c)(3) classification by the IRS. To qualify, private foundations require a governing board, annual reporting to the IRS, and minimum gifting each year.
- Charitable Trusts: Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) operate in a similar way to donor-advised funds and foundations. Income is distributed from the trust to the designated beneficiaries. Once the donor passes away, the charities they’ve chosen are the beneficiaries of the remainder of the trust.
- Giving from an IRA (QCD—Qualified Charitable Distribution): If you are over 70 ½ years old, you can contribute up to $100,000 from an IRA to a charitable organization. By doing so, you can avoid ordinary income tax, and the charity pays no tax. Giving from an IRA is called a qualified charitable distribution.
- Impact investing: Impact investing provides both a blessing to others and a possible financial return to the investor. While investing always involves the risk of loss, impact investments often produce market-rate returns and in some cases exceed investor expectations. It’s even possible to do impact investing with charitable dollars through your DAF.
Why is Charitable Planning Important?
When you have a desire for generosity in retirement, it’s important to have a plan. That way, you can understand where your money is going, optimize your tax strategies, and impact the community all at the same time. Let’s break down the financial, societal, and personal impacts of charitable planning.
Financial Benefits of Charitable Planning
While it’s not the key reason you should create a charitable plan, giving can help you save money on taxes. To encourage charitable giving, the IRS has several tax deduction options for charitable giving, including the following:
- Taxes: The IRS rules for itemizing charitable contributions can change frequently. In general, you can itemize anywhere from 20-60% of your adjusted gross income. The amount deducted depends on the type of contribution.
- Estate planning: Did you know that you are subject to being taxed even upon your death? Death taxes are how the government taxes your estate after you have passed away. They typically only apply to families in higher tax brackets. Giving more out of your estate to charities or family members can help you avoid high death taxes.
- Long-term growth: When you begin charitable planning early, your money will have more time to grow. Setting up regular giving, whether it’s in a donor-advised fund, trust, or something else, allows your money to appreciate over time. Then, you and your family can watch your generosity impact the world! Think also of the compound effect after you have made the gift. There is more time for your gift to impact your community and people’s lives, perhaps for generations.
The Societal Impact of Charitable Planning
So many organizations rely on charitable gifts to survive. Many of these organizations leave a lasting impact on their community. When you consider which charities to give to, look for the following organizations:
- 501(c)(3) organizations. Most nonprofits you come across are categorized as 501(c)(3) by the IRS. This designation means they are exempt from taxation. All 501(c)(3)s are nonprofits, but not all nonprofits are 501(c)(3)s.
- Churches or ministries. Typically churches and ministries are 501(c)(3)s and rely on tithing or donations for funding.
- 509(a) organizations. These are also tax-exempt nonprofits, but this designation is usually reserved for private foundations.
- Others. Some organizations are tax-exempt without being 501(c)(3)s. Examples include social clubs, welfare organizations, and business leagues.
Whether or not you see the fruits of your generosity, your giving truly does make a difference in your community. Charitable giving in the US represents 1.44% of our GDP—we love giving! A report from the New York Times found that people are more likely to donate when they know their dollars will truly make a difference, and not just go into the CEO’s pocket.
The Personal Impact of Charitable Giving
Have you ever met a generous person who was dissatisfied and unhappy with their life? We didn’t think so! Scientific studies have shown that being a cheerful giver improves your outlook on life. Even those who are not motivated by their faith find more meaning in their life when they give.
Not only does it make your life better, but it also improves the lives of those around you. When you lead by example, you teach your children and family the importance of generosity. And if they are going to inherit some of your money in the future, their understanding of generosity is a vital piece of your planning puzzle.
Charitable giving can also increase your trust in God! Proper planning and being prepared for the future is important—and something God wants us to do. Noah built an ark, after all! However, sacrificing part of your money by being generous is a spiritual discipline in and of itself. You are telling God that you trust him with what you have left over.
Put another way, generosity is the “antidote” to greed and materialism.
Getting Started with Charitable Planning
Now that we’ve discussed what charitable planning is and who it benefits, let’s talk about how you can get started with your plan for generosity. Getting started is simple, and planning for your future and the people you could impact is fulfilling in and of itself.
- Have a conversation. Have an intentional conversation with your spouse, children, or other family members about how you want to be generous now, in retirement, and beyond. Make sure everyone is on the same page. Do you want to increase giving to your church, or choose another ministry that’s close to your heart? How much do you want to give out of your assets? How can your family partner with you in your generosity?
- Choose the causes you care about. It’s honorable to spontaneously give in the wake of a crisis or disaster, but charitable planning can make your giving much more strategic and vet which charities you’d like to donate to. Follow where your passions lie. If you’re passionate about the arts, contribute to your local performing arts center or museum. If you are rooting for the next generation, consider supporting a local college or school system. If you’ve always wanted to make a global impact, look into overseas ministries that feed the hungry or provide life-giving aid.
- Examine your assets. Look at where your money currently resides, even if you aren’t retired yet. Your financial picture can provide you a glimpse of ways you can give in retirement. Your capacity to give will depend on what sort of accounts you have and how much money is in them.
- Talk to an advisor. Financial advisors like Generous Wealth love nothing more than walking alongside you toward retirement. Talking with an advisor can help you gain a better understanding of your assets and how you might be able to use them for generosity.
Resources and Tools for Charitable Planning
Unsure of how to get started on charitable planning? We recommend a few simple tools to help you make the best decisions for you and your family:
- I Like Giving: I Like Giving is a foundation that began in 2010 to inspire people around the world to live generously. Not only is this website inspiring and full of stories of generosity, but it also provides tools for classrooms, businesses, and families to learn more about generosity. This is a great tool to use with your family and inspire them, too!
- Guidestar: Guidestar is the leading platform for researching nonprofits. It provides financial records for current nonprofits and explains what they do and the causes they support.
- Charitable Giving Tax Savings Calculator: This online calculator can help you calculate your charitable giving tax deductions based on your filing status and income. This is a great tool to use with a financial advisor!
Bring Joy to Your Charitable Planning
2 Corinthians 9:7 says that God loves the heart of a cheerful giver. When you approach charitable giving with a heart of generosity and a willingness to give, imagine the joy that will compound in your heart over time! With the proper planning, you can give confidently to causes you care about and provide for your family.
We truly believe that both are possible at Generous Wealth Advisors. We’ve made plans for our own finances that factor in charitable giving to our retirement plans and trusts. We can help you do the same without adding heavy financial burdens to your retirement plan. Schedule a free, no-obligation call with our team today to find out more.
