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Retirement

3 Tax-Friendly Charitable-Giving Strategies for Retirees

Consider these ideas before filing your taxes.

An illustrative image of Christine Benz, director of personal finance and retirement planning of Morningstar.

Charitable giving isn’t just for heavy hitters whose names are etched on plaques on the walls of museums and hospitals. It’s also for generous-hearted people of more modest means who want to do their part to make the world a bit better. And I say keep it up. Numerous studies have corroborated the connection between giving and happiness. In a paper titled “Prosocial Spending and Happiness,” for example, researchers found that spending money on others helps elevate people’s sense of happiness and well-being.

Charitable giving can also make good financial sense for retirees, both wealthy ones and those of more modest means. Not only can they take advantage of strategies like qualified charitable distributions from IRAs, but they might also be more likely than younger adults to itemize their deductions because of higher healthcare costs. That means that they’ll receive credit for their donations.

As retirees think about their charitable-giving strategies ahead of filing taxes, here are some key considerations.

Use Qualified Charitable Distributions

A qualified charitable distribution, or QCD, from an IRA provides another mechanism for retirees to give to charity regardless of whether they itemize or claim the standard deduction. Under a QCD, which is available once you turn age 70.5, you simply instruct the investment firm to steer a portion of your IRA, up to $100,000, to the charity or charities of your choice. That donated amount avoids income tax altogether. For retirees with highly appreciated assets in their accounts, the QCD provides a nice “fourfer”: It allows them to be charitable, it fulfills all or a portion of their required minimum distribution obligations if they’re age 73, it reduces their RMD-subject balances, and, to the extent that they sell appreciated assets to fund the QCD, it can help reduce risk in their portfolios. Note that there’s a bit of a disconnect between the QCD-eligible age (70.5) and when RMDs kick in (currently 73). For retirees who are in the enviable position of having more in their IRAs than they think they’ll ever need in their own lifetimes, starting QCDs at age 70.5 helps reduce the balance that will eventually be subject to RMDs.

It’s also worth noting that traditional IRA assets are ideal to earmark for charity through beneficiary designations. Even though naming a charity as an IRA beneficiary doesn’t confer any sort of immediate tax benefit, in contrast with the QCD, the assets fully escape taxation upon your death. Roth IRA assets, meanwhile, are less desirable as charitable beneficiaries, because qualified withdrawals wouldn’t be taxable to you during your lifetime or to your heirs after your death. (They may be subject to estate tax, though.) In other words, you or your loved ones can better enjoy the tax benefits than the charity could. Also, remember that it doesn’t need to be either/or with beneficiary designations; you can name multiple beneficiaries in varying percentages—for example, 90% to your adult daughter and 10% to a charity.

Bunch Charitable Giving With Other Deductions in the Same Tax Year

Thanks to the higher standard deduction amounts in place today, as well as the cap on state and local taxes that may be deducted, many retirees aren’t itemizing their tax returns. That means they may not be getting credit for their charitable giving. However, retirees who wouldn’t normally be itemizers may be able to “bunch” other deductions on their tax return for the year in which they make the large charitable gift—for example, expensive elective dental procedures. That strategy can help them get the most bang for their deductions in the itemization year.

Donate Highly Appreciated Assets From Taxable Accounts

Stocks have been strong performers over the past 15 years, meaning that many retirees are apt to have highly appreciated assets in their portfolios. For retirees who have substantial non-IRA assets—taxable assets that would otherwise be subject to capital gains tax upon sale—gifting highly appreciated positions to charity during your lifetime can confer multiple benefits, tax and otherwise. First and foremost, the charity receives the full benefit of the amount gifted—it won’t owe tax—and you can deduct the charitable contribution on your tax return. (Individuals can deduct charitable contributions of up to 60% of their adjusted gross incomes, but certain limitations apply; get some tax help if you’re making a very large gift.) And if the assets have appreciated sharply since purchase, the charitable gift effectively washes out your own tax liability while also reducing risk in your portfolio.

You can give the assets directly to charity or use a donor-advised fund. Donor-advised funds can often accept less liquid securities that charities aren’t well equipped to handle. Just be sure to mind the fees of donor-advised funds: My colleague Amy Arnott took a worthwhile spin through the major donor-advised funds in a series that included Vanguard Charitable, Schwab Charitable, and Fidelity Charitable Gift Fund.

This article was previously published in February 2023.

Clarification: (Feb. 16, 2023) This article has been updated to clarify that Roth IRA assets are less desirable as charitable beneficiaries, not as IRA beneficiaries.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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