Charitable Giving Strategies In Retirement
“Don’t do that. That’s the worst way to do it.” What was I talking about?
Charitable giving.
My client was writing checks to his church directly from his personal account. Admirable, but he was doing it with after-tax income when he had several better options available. These alternatives would benefit the church just as much while providing him with significant (and legal) tax advantages.
Charitable contributions are a great way to help others. Still, there are better ways to give than others. Let’s explore three powerful methods that can help you give more effectively.
Qualified Charitable Distributions
The first strategy—and the one my client wasn’t utilizing—is what’s called a qualified charitable distribution (QCD). This approach is particularly relevant once you reach retirement age.
When you hit age 73 or 75 (depending on your birth year), the IRS requires you to take required minimum distributions (RMDs) from your retirement accounts. These RMDs are calculated using a formula that typically starts around 4% of your account value and must be taken annually, regardless of whether you need the money.
My client was taking these required distributions, depositing them into his bank account, and then writing checks to his church. This method isn’t optimal from a tax perspective.
A Better Approach
Send the donation check directly from your IRA to the charity or church you support. This is a qualified charitable distribution, and it offers significant advantages:
- You can donate up to $100,000 annually directly from your IRA
- The amount counts toward your required minimum distribution
- Unlike regular distributions, QCDs don’t count as taxable income
It’s important to note that you need to coordinate with both your IRA custodian and the receiving organization. Make them aware that you’ll be sending a check directly from your IRA custodian. These checks often arrive in nondescript envelopes, so your charity should be on the lookout to ensure they don’t mistake it for junk mail.
While required minimum distributions now start at age 73 or 75, you can actually begin making qualified charitable distributions at age 70½. This gives you a potential multi-year window to make tax-advantaged donations before RMDs kick in.
One critical detail: QCDs can only come from Individual Retirement Accounts (IRAs). For whatever reason, Congress hasn’t extended this benefit to employer-sponsored retirement plans like 401(k)s or 403(b)s.
Donor-Advised Funds
The second option for charitable giving in retirement is a donor-advised fund. This is essentially an account that allows you to make charitable contributions in a more strategic way.
When you contribute to a donor-advised fund, you immediately receive a tax deduction because the fund itself is a qualified charity. However, you don’t have to decide immediately which organizations will ultimately receive your donations. This provides several advantages:
- You can spread your gifts over time while getting the tax deduction upfront
- It simplifies reporting if you give to multiple organizations
- The money can remain invested and potentially grow while in the fund
Donor-advised funds are particularly valuable if your annual charitable giving falls below the standard deduction threshold (approximately $30,000 for married couples). In such cases, you don’t receive any tax benefit for your charitable contributions.
Strategic Bunching
Instead of giving, say, $10,000 annually for five years (totaling $50,000), you could contribute $50,000 to a donor-advised fund in a single year. This larger amount would exceed the standard deduction, allowing you to itemize and receive a tax benefit. You could then distribute those funds to your chosen charities over the next five years.
While donor-advised funds typically offer fewer investment options than your regular brokerage account, they still allow your charitable dollars to potentially grow tax-free before being distributed.
Gifting Appreciated Assets
The third strategy is gifting appreciated assets. This method is particularly relevant for Disney professionals who have accumulated company stock through long-term incentive (LTI) programs or the Employee Stock Purchase Plan (ESPP).
If you own stock or securities that have increased in value, you can donate these assets directly to a charitable organization instead of cash. This approach offers dual tax benefits:
- You avoid paying capital gains tax on the appreciation
- You still get a tax deduction for the full market value of the donated securities
For example, if you purchased Disney stock at $50 per share and it’s now worth over $100, donating those shares directly to charity means:
- You don’t pay taxes on the $50+ per share gain
- You get a tax deduction for the full $100+ per share value (assuming you itemize deductions)
This strategy works with various appreciated assets such as
- Stocks
- Mutual funds
- Bonds
- Real estate
- Art or other valuable items
The charity receives the full value of the asset and can sell it without paying capital gains tax, while you receive maximum tax benefits. Everyone wins!
For Disney cast members who have accumulated company stock over their careers, this can be an especially powerful way to support causes you care about while optimizing your tax situation.
Optimizing Charitable Giving in Retirement
These three strategies provide Disney professionals with powerful tools for charitable giving in retirement. Each method offers unique advantages:
- QCDs allow you to satisfy required minimum distributions while supporting charities tax-free
- Donor-advised funds help you maximize tax deductions through strategic timing
- Gifting appreciated stock eliminates capital gains tax while providing a deduction for the full market value
By implementing these tax-efficient charitable giving strategies, you can support the organizations you care about while minimizing your tax burden—a win-win approach to philanthropy.
Remember that the specific strategy that works best for you will depend on your individual financial situation, retirement timeline, and charitable goals. Consider discussing these options with a financial advisor who understands the unique benefits and compensation structures available to Disney professionals.
With thoughtful planning, your charitable giving can create a meaningful legacy while also supporting your financial well-being throughout retirement.
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