How to Give Back without Sacrificing Your Nest Egg

How to Give Back without Sacrificing Your Nest Egg

March 22, 2022
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As retirement approaches, consider ways to donate to charity without depleting your long-term savings.

If you expect to retire in 5 to 10 years, you may currently earn near-peak income. It’s an excellent time to front-load your charitable giving and receive the maximum tax benefit. This way, you do well for yourself as you do good for others.

Decide how much to give. There’s no hard and fast rule for how much of your disposable income should go to charity. The average percentage is around 2%.1 Working with your financial professional, you can tweak the amount you contribute to yield the maximum tax benefit.

Know the deduction rules. The $300 deduction for charitable giving by individuals who don’t itemize ended in 2021. If you itemize deductions in 2022, you can deduct up to 60% of your adjusted gross income (AGI) for cash contributions and 30% for long-term appreciated securities.2 To get the full deduction, you must ensure the recipient is qualified to receive tax-deductible donations.

It’s not just cash. You can avoid the 20% maximum long-term capital gains tax on appreciated securities by donating them directly to charity instead of selling them first and then donating the proceeds. You’ll also reduce the income subject to the 3.8% Medicare surtax.3 You’ll receive a deduction based upon the stock’s current market value, not your cost basis. Excess donations can be deducted for up to five years going forward. A donor-advised fund is a convenient and tax-efficient vehicle for donating assets.

Plan your post-retirement giving. You can make qualified charitable distributions (QCDs) of up to $100,000/year from your IRA starting at age 70 ½ (not the RMD starting age of 72, due to a quirk in the law) to avoid paying taxes on the distribution.4 Although not deductible, a QCD can shield RMDs from taxes, making them especially useful if you don’t expect to itemize deductions in retirement. Also, consider making a charitable contribution to offset the taxes triggered by converting a traditional IRA to a Roth.

Charity begins at home. Your primary obligation is to ensure a comfortable retirement and provide for your family. Temper your generosity by intelligently donating to charities in ways and amounts that fit your unique circumstance. Please get in touch with me at your convenience to discuss a charitable giving plan that works with, not against, your retirement goals.

1 marketwatch.com/story/how-much-money-should-you-be-giving-to-charity-2018-09-24 [12/8/19]
2 nerdwallet.com/article/taxes/tax-deductible-donations-charity [1/7/22]
3 fidelitycharitable.org/guidance/charitable-tax-strategies/reduce-taxable-income.html
4 investopedia.com/articles/financial-advisors/032116/how-use-qcd-rule-reduce-your-taxes.asp [4/28/21]

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