So you’ve made it to retirement, and realize you have done it with room to spare. A surplus of assets, more than enough to cover your desired lifestyle for many years to come, puts you in a position to have a meaningful impact on the lives of those you love, and on the causes you support. Everyone’s situation is different, of course, but here are twelve do-good strategies that may enable you to help those around you in a manner that is tax efficient, and which smoothly coordinates your resources and your goals.
For younger family members, such as grandchildren, education is often a foundational element to their success, but is also a considerable expense. To support that educational foundation getting built, here are some ways you might assist them:
- College Savings: Monies placed in a 529 Educational Savings Account enjoy tax free growth and withdrawals if used for qualifying educational expenses. This includes higher education and up to $10,000 of elementary or high school tuition. (Note that state tax laws may vary on the latter.) Many states offer an income tax deduction for contributions made into their state plan. Whether to contribute into a plan in your own name, or in the name of another, can depend upon state deduction laws, financial aid implications, and other variables. In addition, the gift tax rules allow five-year forward lump sum gifting, but filing for this election is important.
- School Payments: Private school, college, or graduate school tuition can be paid directly to the school, without being subject to gift tax limitations.
- Gifting: In some situations, portfolio assets can be wisely deployed to fund educational costs. If a family member is in a low enough tax bracket (i.e., taxable income of $39,375 or less for single filers in 2019), they may qualify for the 0% capital gains rate. In that scenario, appreciated securities can be gifted to them, and then liquidated at no tax consequence. The proceeds can then be used to pay for school. (Note this is often a graduate school funding strategy, since something known as the “kiddie tax” is avoided only if the recipient is at least 24 years old.) It is important to keep in mind that this and other gifting may require filing a gift tax form and commensurate gift taxes, if the limits are exceeded.
- Student Loan Assistance: For those who have incurred debt in attaining their education, helping in relation to their student loans can give them a meaningful boost in an early stage of their career. Reducing their balances may help them get a better rate when consolidating or refinancing, improve their near-term cash flow, and shorten the duration of their repayment period. Of course, this may require adherence to gift tax filing and tax rules.
In addition to formal schooling, you might also be able to help others in their own wealth building and retirement planning processes, as well as enhance their quality of life. This may include:
- IRA contributions: Funding an IRA or a Roth IRA for someone who has earned income, but perhaps limited cash flow, is a great way to start them on the right path for retirement planning. A teenager with a summer job would make a good candidate for this strategy. The longer the time horizon, the greater the potential for wealth accumulation, through the power of compounding. This is also considered a gift, so complying with gift tax filing and rules may be needed.
- Market Entry: Funding the purchase of securities in the name of a relative can give them a sense of ownership, and may cultivate an interest in both savings and in the financial markets themselves. A Dividend Reinvestment Plan (DRIP) account, in which earnings are used to purchase additional shares, can be a great start down that path. This may require adherence to gift tax filing and tax rules.
- Home Purchase: A home purchase is one of the biggest financial decisions in most people’s lives. Assisting an individual or couple with the down payment on a first home may help them attain a better mortgage interest rate, reduce their monthly expenses, and set them on a path of building long-term equity. Again, this may require filing a gift tax form and commensurate gift taxes if the limits are exceeded.
- Planned Vacation: Plan a vacation that you, your grown children, and their children might all take together. Funding a trip that the others might not otherwise be able to afford will provide the opportunity to create lasting memories, and draw the family closer despite busy lives.
Beyond family members, you might also seek to improve the world around you, through your support of various charities and causes. With that in mind, you could consider:
- Asset donation: Gifting an appreciated publicly traded security to most 501c(3) organizations will provide you with a deduction equal to the full market value of the shares given (up to 30% of your adjusted gross income, with deduction carryforwards of up to 5 additional years). It will also avoid any capital gains taxes that would be incurred if you sold the asset. There are a variety of charitable giving vehicles, and tax-efficient strategies to go with them. Some of them also provide an income stream. A more-detailed discussion on those instruments can be found here.
- IRA Rollovers: Known as Qualified Charitable Distributions (QCDs), this option is available to those, aged 70½ or older, who are subject to Required Minimum Distributions (RMDs) on an IRA account. Payments made directly from the IRA to a qualified charity are not counted as taxable income. Depending upon your circumstances and cash needs, you might direct your entire RMD (up to a maximum of $100,000) or a portion of it to your desired charities. Note that you must present this information to your accountant to have the income not be taxed as the 1099-R for a QCD is not coded for charity.
- Life Insurance: In some cases, an accumulation of resources can leave you with a life insurance policy that you, or your family, no longer need. In that scenario, you might consider naming a charity as the beneficiary. With some charities, it may also be possible to transfer ownership of the policy to them during your lifetime, and to obtain a tax deduction in the process. (Your results depend upon the type of policy and the particular charity involved, so a thorough evaluation of the tax consequences and other ramifications should be taken before proceeding.)
- Bargain Sale: Through the sale of an appreciated asset, such as real estate, to a charity at less than fair market value, you might secure cash proceeds while obtaining a charitable deduction and reducing capital gains. By doing so, you will also have made a gift of significant impact to that organization.
Obviously, before any gift planning can occur, you first have to confirm that your own financial needs will be met under a variety of future circumstances. The strategies above are neither exhaustive nor applicable to everyone. Please consult your wealth manager for further evaluation of these or other similar strategies. Hopefully, however, this provides a sampling of some of the potential giving strategies, given your particular circumstances, that can be undertaken in retirement. The hard work, disciplined savings, and forethought that positioned you well for retirement itself can also provide the foundation for you to touch the lives of your loved ones, and those in your community, going forward.
Retired? You’ve only just begun!