Today on Market Vizion, we're going to talk about the strategic use of donor-advised funds.
Donor-advised funds are vehicles that have become more popular, more invoked within the financial planning process. Specifically, we think there is a real sweet spot for executives who are in that last five to seven years of their career of their working years to use donor-advised funds strategically to get maximum tax benefits.
This is at the core of who we are at Vizionary Wealth Management. One of our top desires is that our clients would be able to fund many of their charitable ambitions and expectations throughout their retirement years.
Sustaining Your Charitable Giving During Retirement
Before we get into the nuts and bolts, there's something I want to ask first. Is charitable giving already a regular part of your lifestyle today? Do you have organizations non-profit entities that you give and take a tax deduction on?
Now let me ask you a second question - one that makes donor advised funds particularly important... When you retire, are you expecting to continue those contributions throughout retirement?
If those two things are true, donor-advised funds may be an immensely powerful tool to use in those last working years of your career.
Managing Your Tax Bracket Before Retirement
As you approach retirement, in those last five to seven years, you are likely to have appreciated stock within your non-retirement portfolio. Also, you are likely in the highest tax bracket you're going to be in.
As a result, the expectation that we all have (if your financial advisor is doing their job) is that you will be managing down your tax bracket as you move into retirement.
For instance, you’ll have money in IRAs, Roth IRAs, non-retirement accounts, things like social security and pensions, and your financial advisor will be working hopefully with your CPA to manage where that income is coming from to get you into a lower tax bracket as you transition into retirement.
That means these last five to seven years where you are in your highest earning years gives you an incredibly unique opportunity.
How Do You Prepare for Sustained Giving During Retirement?
For the sake of real numbers, let's say that you want to be able to give $20,000 a year. In order to fund that, we would need $400,000 to $500,000 in a donor-advised fund to sustain through the rest of your life.
It gives you a concrete number that becomes part of the strategic conversation – the target of getting $400,000 - $500,000 into a donor-advised fund by the time you retire. That way we can fund that $20,000 or so in contributions to charities of your choice for the rest of your life.
Now we have set a strategic goal, the question is, how do we get there?
Maximizing Your Giving Strength with Donor Advised Funds
Well, if you are three to five or three to seven years from retirement, the way we get there is to work backwards.
- How much do we need to contribute each year?
- What assets are most effective to donate? (DAF's allow you to donate assets beyond cash like stocks or property)
For instance, for our clients, we go through the non-retirement portion of the portfolio and we look for that most highly appreciated stock. As I'm writing this, it might be Tesla, which was up 1,000 plus percent over the last year.
We'll identify that stock position and possibly look to donate a portion of that position into the donor-advised fund any year where you're in a very high-income tax bracket. Why?
Because first of all, you're getting the maximum tax bracket reduction in your income tax. So, if you have an income that is being taxed at above 37%, then you're getting the maximum tax deduction on the income side.
On the other side, you're also able to avoid the capital gains taxes on the stock positions you gift to a donor advised fund and maximize the dollars going to your favorite causes!
Establishing a Charitable Legacy
Donor advised funds are unique in their ability to maximize your charitable strength while managing your tax bracket, especially during your highest income years. It enables you to have a very strategic, very advantageous approach to funding your lifetime charitable ambitions.
Here at Vizionary Wealth Management, we're always here with perspective for the decisions ahead. If this has been helpful or if we can help you with some of your strategies around your financial planning, please don't hesitate to reach out. We're always happy to have a no obligation consultation. Take care.