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10 Tips for Charitable Giving During Retirement

Get the basics on deductibility, estate planning, and naming a charity as IRA beneficiary.

As I was recently helping an older relative with her tax return, I noticed a tidy file containing receipts for charitable gifts that she had made throughout the prior year. She's not a wealthy person and the gifts weren't huge, but when I commented on them, it was obvious that she took great pride in her ability to help her favorite causes. Homeless animals, needy children, and mentally handicapped adults, among others, had all been beneficiaries of her generosity throughout 2010.

In addition to the tax breaks available on charitable contributions, numerous studies have corroborated that there's a psychological benefit of charitable giving--the so-called "helper's high." A growing body of research also indicates that altruism may be associated with improved physical health, too. Studies of recovering cardiac patients showed that those who provided emotional support to other patients had better survival rates than those who did not, for example. Another study demonstrated that the release of endorphins that often accompanies a good deed can lead to a decrease in pain.

Of course, the recent recession and corresponding market downturn have crimped many seniors' ability to give. Many retirees are struggling to make ends meet themselves, or are helping kids and grandkids with college savings or balancing their own household budgets. But like my relative, you don't need to be a high-rolling Neiman Marcus shopper for charitable giving to be a part of your life, even during retirement.

Here are some tips to ensure that you get the maximum bang for your buck.

Tip 1: Stress-test your portfolio's longevity before making financial gifts to charity.
Before deciding how much to give to charity, a key first step is to make sure you're thoroughly comfortable with your nest egg's ability to last throughout a very long retirement. Numerous tools available on the Web--including Morningstar's  Asset Allocator and T. Rowe Price's Retirement Income Calculator--can help you evaluate whether your portfolio can support your planned withdrawal rate, including charitable contributions. (Just bear in mind that these calculators' asset-class return expectations may be overly sunny, as outlined in this article.) If there's a possibility of falling short, a better option would be to defer charitable lifetime gifts and instead weave charitable giving into your estate plan (more on that below).

Tip 2: Consider a gift of time.
If it turns out that charitable gifts during your lifetime are unaffordable, you can still make a difference by volunteering your time at your favorite charity. Doing so won't earn you a tax deduction, but getting out and about to help in your community will likely provide even more of the feel-good effects that you experience when giving cash or writing a check.

Tip 3: Check up on the charity's effectiveness.
If you're in a position to make a financial contribution to a charity, it's only natural to winnow down the field to those causes with which you have a personal or emotional connection. But don't rely solely on your heart when deciding where to contribute. Web sites like Charity Navigator rate charities on their efficiency, showing you what percentage of their revenues go to actual programming and how much goes to administrative and fundraising expenses. Because charity-rating sites rely on public filings for their inputs, the data may not be up to the minute, but it's still a good way to get your arms around an organization's effectiveness. In its rating system, Charity Navigator downgrades charities that are not spending at least two thirds of their budgets on actual programming; ideally, your favorite charity will boast numbers much higher than that.

Tip 4: Understand the rules about deductibility.
One of the big perks of making charitable contributions is that you may be able to earn a tax deduction on your gift, assuming your itemized deductions exceed the standard deduction. But those deductions are subject to certain limits. While gifts to most public charities will be tax-deductible, contributions to certain organizations, such as political groups and foreign charities, may not be. Moreover, if you're contributing a very high amount of your adjusted gross income to charity, the deductibility of your contributions may be limited. The limits depend on the type of charity you're contributing to--most contributions to public charities are fully deductible as long as your contribution doesn't exceed 50% of your adjusted gross income. If you've contributed property, the deduction is normally equal to the property's fair market value at the time of the gift, assuming the property is in "good condition or better."

 

Tip 5: Document, document, document.
In a related vein, it's also important to ensure that you've received the proper paperwork for deductible contributions. At a minimum, you'll need a receipt with the organization's name, along with the date and amount of the contribution. If you've received something in exchange for your contribution--say, a fancy dinner at a charity's gala event or a magazine subscription in exchange for your PBS donation--you'll need to subtract that amount from your contribution. For deductibility's sake, you'll also need a receipt for any property donated--that's one reason it pays to hand off clothes, furniture, and other property to a live human being rather than using a drop box for donated goods. If you're donating property with a high price tag attached to it, check with your tax advisor about the specific documentation that you'll need for the contribution to be tax-deductible.

Tip 6: Consider gifting highly appreciated securities during your lifetime.
Are a handful of highly appreciated securities--perhaps company stock--hogging a disproportionate share of your retirement portfolio? Would you like to take some money off the table but you're worried about triggering a big capital-gains bill? If so, you might consider gifting all or part of those holdings to charity. Assuming you've held the securities for more than a year, you'll receive a tax deduction (consisting of the fair market value of the securities at the time you make the donation), and you won't owe any capital gains taxes on the securities' appreciation. By contrast, if you're holding securities at a loss and want to get rid of them, you're better off selling first, realizing a loss, and then donating the proceeds to charity. You can then use the loss to offset capital gains and, if there's money left over, ordinary income.

Tip 7: Consider Using RMDs for Charitable Contributions
Do you have to take required minimum distributions from your IRA but don't need the money? If so, you can plow up to $100,000 from your RMD directly into a charity. You won't receive a tax deduction on your charitable contribution, but you'll get an even more valuable benefit: You won't owe taxes on the amount of RMD you contributed to charity. Talk to your financial-services provider before undertaking such a transfer, because the money must go directly from that firm to the charity to qualify for the special tax treatment.

Tip 8: Consider naming a charity as IRA beneficiary.
If you want to make charitable giving part of your estate plan, one idea is to make a charity the beneficiary of your IRA. Not only will the charity receive the assets tax-free, but your estate will also be eligible for a charitable deduction. By contrast, if you name children or other heirs as the beneficiary of the IRA, they'll pay taxes when they take withdrawals from the account. If you'd like part of your IRA assets to go to charity and part to your spouse or children, consider splitting your IRA into separate IRA accounts, each with its own beneficiary designation. The advantage of this approach is that distributions from IRA accounts with named beneficiaries (i.e., humans) can be stretched out over a longer period than distributions of IRA assets that are earmarked for charity.

Tip 9: Investigate donor-advised funds.
For active investors who would like to undertake a formal giving program, donor-advised funds--which are gifting accounts offered by third parties--are an increasingly popular option. There are a few key tax benefits: You can deduct your contribution at the time you put it into the fund, and you can also contribute highly appreciated securities, thereby escaping capital-gains tax on those amounts. While the funds are administered by a third party--Vanguard and Fidelity are among the biggest providers of donor-advised funds--you are still able to exert some control over how the assets are invested. After you've made the contribution, you can then recommend distributions to the qualified charities of your choice. (The actual grant comes from the financial institution.) Such programs can make attractive alternatives to family foundations, which can be costly and time-intensive to administer.

Tip 10: Consider a trust if you're making very large charitable gifts.
The aforementioned tips generally apply to charitable gifts that aren't huge. But for those in a position to contribute very large sums to charity, a charitable trust might make sense. There are two basic flavors of charitable trust--a charitable remainder trust and charitable lead trust. With the former, the donor receives income from the trust for a predetermined period of years, but the assets in the trust will ultimately revert to the charity. The benefit of such a trust is that you can fund it with highly appreciated securities but ultimately owe no taxes on your gains, because your contribution is irrevocable. A charitable lead trust is a near-mirror image of a charitable remainder trust. During the term of the trust, income flows to the charity. But after the trust term is up, the assets revert to the donor or to the donor's beneficiaries.

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