Now that Thanksgiving, Black Friday, and Cyber Monday are over, there’s another more recently adopted holiday to look forward to: Giving Tuesday.
Giving Tuesday is a day when people can give back to those in need, whether through donations, volunteering, fundraising, etc. If you choose to give back during this season of gratitude, it’s important to reevaluate your financial plan to include your favorite organizations. , decide on a system that works for you and choose the best donation method, while helping your bank account in the process.
Julie Virta, CFP®, Senior Financial Advisor at Vanguard Personal Advisor Services, shares four approaches to integrating or reorganizing giving into your financial plan.
Qualified charitable distributions from an IRA account
The first way to donate as part of your financial plan is to make qualified charitable distributions (QDCs) from an IRA. Although you can only use this process after the full retirement age of 70.5, with this method you have the ability to donate up to $100,000 directly to this traditional IRA.
“This can be a really good starting point for retirees who have larger traditional IRAs,” Virta said. “Especially if you’re already taking the required distributions, it can offset [them and] you don’t necessarily need that money.
Securities vs Cash
When you donate, there are other ways to donate than cash or check – securities. If you have saved throughout your retirement in a valued fund, you can donate that security to most organizations in lieu of cash.
“For example, if you wanted to make a large cash donation to an organization, instead of just writing a check for it, you could donate securities for the same amount,” Virta said. “It would be a way for you to not have to sell the stock, realize a capital gain, and then give away the money from that proceeds.”
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Combine donations
Often people choose multiple charities to donate to throughout the holiday season rather than just one. This method of bundling donations, or donating to various entities at once, can actually maximize your taxes and be more beneficial financially.
“If you have a commitment to a charity or a few charities that you want to donate to, maybe over a 12 month period, sometimes you may want to group them together to take advantage of the tax deduction – if you wanted all that tax deduction in one year,” Virta said.
For example, “rather than giving to one organization in December and another in January, do them both this year and then you will get a greater amount of tax deduction in a year instead of the spread over two years, [when] you might not have as many options on that tax deduction,” Virta said.
Donor Advised Fund
If you’re someone who wants to get the immediate tax deduction, but aren’t sure which charities you want to donate to, you can use a donor-advised fund.
What is a Donor Advised Fund? – “a vehicle that you can donate to and then basically you can let the dollars stay in that vehicle and they can grow with the market. And then you can donate it to the different charities that you want to donate to in the future , but it gives you the immediate tax deduction right off the bat,” Virta said.
In other words, moving money into a donor-advised fund gives you immediate tax deduction over time to later determine which organizations you want to benefit from those dollars.
There is also a way to combine this strategy with the titles method for those who want to give titles and not money.
“If you were giving to a donor-advised fund and you didn’t necessarily know your charities yet, you could donate securities to the donor-advised fund in order to leverage securities rather than cash” , said Virta.
Procedure (and remedies) of the action
While it’s important to consider charitable giving when developing your first financial plan, it’s equally important to review these giving plans on an annual basis. Factors such as the state of the market, your retired status, organizations you choose, etc. may differ, and these should be reassessed and reflected in your overall financial plan.
“You don’t necessarily have to do the same thing every year. Maybe a year, it’s more advantageous for you to give sureties. Whereas this year you may have turned 70.5 and want to withdraw a few dollars from your IRA,” Virta said. “It’s really something that should be reassessed every year as you give and think about the best approach for this year in terms of how do I give?”
Keep these tips in mind for your charitable giving and consult with a CFP® to help you incorporate strategies into your personal financial plan. Good gift!
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