Some people aspire to help others with the wealth they have built for retirement. There are a number of ways to be generous when you reach this stage in your financial life, both for altruistic and planning purposes. The top three giving priorities are typically charity, children and grandchildren. You can plan for each of these in a few different ways.
Charitable giving. Your retirement wealth can do a lot to help an organization you believe in. Here are a few ways to get a tax break while promoting a worthy cause.
-- Appreciated investments. Appreciated investments are an extremely efficient way to support your favorite charity. You receive a charitable deduction at the fair market value on the date of the contribution. You also avoid having to pay capital gains taxes on the appreciation of the security. Fidelity Charitable and Schwab Charitable are examples of custodians that allow you to donate stock, mutual funds and other appreciated investments.
-- IRA charitable distribution. In past years, those over age 70 1/2 were able to minimize the tax impact of their required minimum distributions from an IRA by redirecting their annual withdrawal to a qualified charity. This allows the retiree to avoid taxation on the distribution and lowers taxable income for the year, which might qualify the retiree for other tax breaks and decrease or eliminate the taxation on Social Security benefits. However, this tax break has not officially been extended for tax year 2015, but has previously been extended at the last minute.
Giving to children. Many parents aspire to leave money to their children. Here are some efficient ways to pass on your wealth.
-- Cash gifts. Giving gifts of appreciated investments to children is completely different than giving those assets to a qualified charity. A significant gift can turn into a tax disaster if not structured correctly. The problem with giving appreciated stock to family is that your tax basis, or the amount used to calculate the gain, passes with the gift. If you give $20,000 of stock that you only paid $5,000 for, you have now transferred the taxation to the gift recipient. If the recipient needs cash and sells the holding, they will be subject to capital gains taxes just like you would have been. It would be much more beneficial to give a gift of cash, and then let the highly appreciated stock receive a step-up in basis at your death.
-- Be aware of the annual gift exclusion. The annual gift exclusion amount is $14,000 in 2015. As long as your individual gifts to any one beneficiary do not exceed the annual exclusion amount, you can avoid filing an annual gift tax return. If you exceed the annual amount, you'll be required to report it to the IRS. The amount will also count against your lifetime federal estate tax exemption (that amount is $5.43 million for 2015). There's plenty of room for gifting, but if you want to avoid the headache of filing a return, stay below the annual limit or pay medical, dental and tuition expenses directly to the providers. There are no limits to direct payments to these types of providers.
Giving to grandchildren. You can do a lot to get your grandchildren off to a good start in life. Here are some key ways to pass wealth to your grandchildren.
-- 529 Plans. One of the best ways to save for college and other post-secondary options including two-year associate degrees, trade and vocational schools is through a 529 plan. As long as the money is used for qualified education expenses, the accounts grow tax-free. Many states also offer tax incentives and deductions. You can research your options and the specifics of each state's offerings at Savingforcollege.com. Morningstar also publishes an annual review of the different plans using a gold, silver, bronze, neutral and negative ratings system. The best plans tend to have low cost providers, good tax incentives and robust investment options. The largest asset plan doesn't necessarily mean it's the best.
-- Custodial accounts. The cost of raising children is expensive, and there are extras that can make a significant impact in the lives of your loved ones. A custodial account allows an adult to open an account for a minor who is under age 18 or 21 (depending on the state). Custodial accounts can help fund a favorite summer camp, horseback riding for your granddaughter, a traveling baseball team for your grandson or a fairy tale wedding. But make sure you understand that control of these accounts eventually passes to your grandchild, and even good children and grandchildren can make immature financial decisions. Additionally, custodial accounts can have a negative impact on financial aid for education.
-- Direct gifts. There are no gift limits for payments made directly to medical and education providers. If your grandchildren attend a private K-12 school, you can pay that tuition directly to the school and not worry if the tuition exceeds the $14,000 annual limit. If there is a medical procedure or treatment, the same rules apply.
Gift giving is a personal decision. Make sure that your giving plan ties into your overall financial road map. Creating a plan that ensures your assets will last a lifetime can be a liberating event that makes the enjoyment of giving even more fulfilling.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, " The Money-Guy Show".
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