How Charitable Tax Deductions Fit into Your Retirement Plan

Throughout your adulthood, you’ve made a strong effort to make considerable donations to charities that are close to your heart.

However, with retirement looming, even with a respectable financial portfolio, you’re worried that it’ll be challenging to maintain that level of philanthropy.

If you’re a woman, this fear is probably even greater, since you tend to outlive men—meaning it’s likelier to outlast one’s savings.

Fortunately, there are studies focused on seniors and charitable contributions. The results ought to offset any doubt. Both retired married couples and retired single women maintained their charitable spending after retirement compared to during their careers.

This ability to continue significant philanthropic pursuits is no happy accident.

Instead, these seniors followed a disciplined and thoughtful financial path. They’d have to, especially since women – the gender that lives longer – are statistically donating the most money.

These wise saving habits and investment decisions ensured the seniors in question wouldn’t outlive their finances while still having enough to regularly make donations.


How Do Seniors Maintain High Charitable Spending?

Being recklessly charitable with your retirement spending might reflect a kindness to others, but it’s definitely not being kind to yourself.

First, you should have monthly retirement paychecks that last you for the remainder of your time on this earth. On top of that, you’ll need a monthly or annual income being generated by your investments. The dollar amount of this income will fluctuate and should be supplemental.

The above scenario relies upon your establishing a portfolio of lifetime retirement income.


The Nuts and Bolts of a Portfolio of Lifetime Retirement Income

Your fixed savings should be rock solid, even in the case of a bottomed-out stock market. These paychecks should only be spent on standard living expenses, for the most part. In other words, generally, spend this money on the following:

  • Housing
  • Utilities
  • Food
  • Medical insurance premiums
  • Income and property taxes

From there, the rest of your savings should be dedicated to amassing “retirement bonuses” in the form of your supplemental investment income. The fluctuations of the market will dictate how much money these investments will generate, but they’re more for non-necessities.

This way, you can cut back on spending in the case of underperforming investments.

Many seniors will use those bonuses to pay for their own interests, such as travel and hobbies, for instance. However, what’s most important to many seniors – such as yourself – is dedicating those “bonus” funds to charities.

Just ensure that you take the time to budget a fixed amount that you can donate to charity every year without outliving your finances.


Another Strategy for Seniors Looking to Donate

Recently, there’s been a change in tax laws that are making it tough for taxpayers to deduct charitable contributions from their taxable income.

While taxpayers can now deduct charitable donations of up to 60% of their adjusted gross income, the new legislation increased the standard deduction. In more direct terms, itemized deductions must be more than your standard deduction on last year’s return to claim charitable donations.

These shifts in the law might deter non-senior taxpayers, but philanthropists who are 70-1/2-years-old are at a distinct advantage. At this age, it’s possible to make qualified charitable contributions from your traditional IRA.

If you make a qualified charitable contribution (QCD) from your IRA, it won’t be counted as taxable income. As such, your donation will be deducted from taxable income.

Furthermore, this distribution comprises your minimum required distribution.


Delving into Qualified Charitable Donations

Here are some essential points to know about qualified charitable distributions:

  • The money contributed must be limited to $100,000 per year
  • The money can’t be funded from Roth IRAs or 401(k) plans
  • If you want to use savings from a 401(k) for charitable spending, you must rollover your savings to an IRA platform that’ll let you write checks
  • Be compliant with the QCD requirements
  • Adhere to the required minimum distributions.
  • Do the math and calculate your QCD tax break
  • Implement a direct transfer to a charity
  • Choose a qualifying charity
  • To successfully exclude your qualified charitable contributions from taxable income, make your donation by Dec. 31 each year

A qualified charity is a non-profit organization that is tax-exempt status in the eyes of the U.S. Treasury.

Interestingly, it’s possible to consider federal, state, and local governments to be qualified charitable organizations. However, that’s only the case provided these governing bodies’ donations are distinctly allocated towards philanthropic causes.

Lastly, it’s worth mentioning that exceeding the maximum allowable amount with your donation will turn it into income in the eyes of the IRS. Therefore, it might face the impact of income taxes.


What About Joint Bank Accounts?

Married couples who file joint tax returns aren’t limited in the amount each spouse can contribute to a qualified charity. Meaning, you and your partner can remove a maximum of $200,000 of your retirement savings from income tax when donating money to a QCD.


How do You Calculate a QCD Tax Break?

Despite no longer earning income, seniors don’t have to donate much to benefit from the impending tax break. Sure, giving the entirety of the maximum $100,000 can result in thousands upon thousands of savings in tax dollars, but that’s not always an option.

If you’re a retiree in the 24% bracket, donating $5,000 has the potential to remove $1,200 from your tax bill.

Let’s take it one step further and bring that donation down to $1000. You’ll still save $240 in taxes.

As you climb up to higher tax brackets, IRA contributions can generate even more sizeable savings and benefits.


Seniors Can Continue Donating Money with Peace of Mind

While married couples and single women are the seniors who donate with the most frequency, this advice applies to all seniors.

Through adhering to disciplined savings strategies and establishing a portfolio of lifetime retirement income, you’ll have the foundation to donate without risk to your finances.

Beyond that, utilizing your IRA to donate can generate savings through tax breaks.

Not only can you benefit in an altruistic sense via charitable contributions, but you can benefit financially as well.


Do you have more questions about charitable donations during retirement? Then contact us today to find out more.

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