Retirement Planning and Charitable Giving

Americans are living longer and healthier lives and thoughts about our “golden years” are changing. Retirement is no longer a short stretch at the end of a long working life. A retirement that begins at age 65 can easily be twenty or more years in length. This is a new phase, a time to do those things you’ve always wanted to do, and an opportunity to redefine and refine your priorities.

Many financial experts believe we need to replace at least 70% of pre-retirement income to maintain our lifestyles after we stop working. That means we need to re-think how we save for retirement, how we convert those savings into income-producing assets, and how we spend during retirement.

Most people contemplating retirement understand that Social Security benefits may offer a retirement income base, but Social Security income alone will not likely provide a fully funded retirement. Therefore, it is important to heed the advice of investment experts to save 10%-15% of pre-tax income and take full advantage of tax-deferred retirement opportunities. The key to a comfortable retirement for most people is using tax-advantaged savings plans to significantly supplement Social Security income.

There are many tax-advantaged savings plan options to choose from, according to your goals for retirement. Many people who have earned income take advantage of Individual Retirement Accounts (IRA’s). There are two types of IRAs. The first type is the traditional IRA, which allows both tax deductible and non-tax-deductible contributions. In either case, all earnings accrue tax-deferred, but upon withdrawal will be taxed as ordinary income. Secondly, there is the Roth IRA, in which contributions are not tax deductible but “qualified” withdrawals from the account, including earnings, are not taxable. In 2024, annual contribution limits for both IRA types increased and are now $7,000 for those under age 50 and $8,000 for those age 50 or older.

In addition to traditional and Roth IRAs, self-employed individuals or small-business owners can also consider a Solo 401(k), a SEP IRA, a SIMPLE IRA, or a defined benefit plan. For those who are not self-employed an alternate choice may be your employer’s 401(k) or 403(b) plan. These are retirement savings plans that allow the employee to make pretax deductible contributions that grow on a tax-deferred basis.

Retirement planning begins with informed calculation and incorporates aspects of income needed, Social Security benefits, pension benefits, and other savings and investments. Visit this Social Security Administration website to access several retirement resources, including planning calculator options: https://www.ssa.gov/retirement.

Retirement may provide you with more time and ability to support charitable causes that matter most to you. You can make a remarkable impact by volunteering your time and investing in these important missions. There are a number of available options for giving in retirement while also reducing the tax burden for you and your loved ones.

IRA Charitable Rollover

If you are age 72 or older, you are required to take a minimum IRA distribution. Normally, these distributions are subject to income taxes. However, for persons aged 70 ½ and older, the IRA Charitable Rollover provision allows you to transfer funds to a public charity each year directly from your traditional or Roth IRA without treating the distribution as taxable income. This is also known as a Qualified Charitable Distribution (QCD). Beginning in 2024, the annual limit is linked to the rate of inflation and is now $105,000. Donors may receive no goods or services in return for their contributions and must obtain written documentation of their contribution from each recipient charity.

If you took the mandatory distribution from your IRA, it would trigger a tax burden. This is true even if you subsequently donated the distribution you received to a charity. To avoid tax, designate that the charity receives the distribution directly from your IRA. If you have a gift you would like to make, or a pledge payment to fulfill, consider funding that gift with a non-taxable distribution from your IRA.

Bequeath Retirement Plans to Charity

For retired persons with the bulk of their assets in individual retirement accounts, corporate or partnership pension plans, or profit-sharing plan accounts, there is another option. Significant advantages exist in giving or bequeathing funds to charitable institutions such as Goshen College from your retirement assets. This can be accomplished by naming Goshen College as a beneficiary.

The disposition of IRA’s, pension, and profit-sharing plans is not governed by a person’s will, but rather by beneficiary designation forms provided by the plan itself.The participant designates on the beneficiary form who she or he wishes to receive the retirement benefits which remain after death. In the absence of a designation, the primary beneficiary is governed by the plan’s terms. A nonprofit organization such as Goshen College can be named as beneficiary, with the non-participant spouse’s consent. (Spousal consent is not required for an IRA, except in some states.)

The designation could take several forms:

• As secondary beneficiary. For example, one’s spouse is named primary beneficiary to receive retirement benefits for his or her life, then the institution would receive payments of those benefits, but with the surviving spouse free to change the secondary beneficiary.
• As contingent beneficiary, meaning that the institution would receive the benefits if the participant’s spouse pre-deceases him or her.
• Goshen College could be named as beneficiary for a percentage of the account or for a stated cash amount.
• If the person is survived by descendants, the designation could be to the surviving spouse first for his or her life and thereafter the balance in the account is divided between Goshen College and those descendants, as well as any other charities the participant desires.

There are distinct tax savings in making testamentary charitable gifts using retirement assets compared to probate assets. Unlike other assets, retirement funds are subject to income tax when distributed, unless the funds are paid to tax-exempt charities.  At death, if persons other than the surviving spouse or tax-exempt charities are beneficiaries of your retirement funds, these funds are potentially subject to additional estate taxes. Under 2024 estate and income tax rates, if your personal estate is worth more than $13,610,000, the total estate and income taxes on retirement plan assets can reduce the value received by 40%.

Alternatively, other assets such as real estate, taxable investments, and business ownership are not subject to income taxes when distributed. Therefore, these could be helpful assets to pass on to loved ones without the burden of the prohibitive tax costs while charitable bequests funded with retirement accounts minimize taxes and enable you to pass assets to Goshen College.

If you have an IRA, pension and/or profit-sharing plan account balance and you are considering naming Goshen College as a beneficiary, be sure to consult a lawyer or other tax advisor to properly execute that designation.

 

The Deferred Payment Charitable Gift Annuity

A deferred payment charitable gift annuity offers an attractive way to make a gift to Goshen College now while guaranteeing personal annual income when you retire or at another time of your choosing. If you need tax deductions during your peak earning years and supplemental income when you retire, the deferred payment gift annuity could be a strong option for you. A deferred payment gift annuity would allow you to receive a current income tax deduction for the value of the gift minus the value of your future annuity payments. The following example illustrates this opportunity:

Example:

Jennifer Lynn is a 55-year-old accomplished sales executive and supporter of Goshen College. She is looking ahead to retirement and wants to make certain that she has sufficient annual income at the time she retires from her company. To supplement her taxable investments, Jennifer has decided that a deferred payment gift annuity would accomplish two of her primary objectives: to assist Goshen College and to provide retirement income for herself. Jennifer is in the 32% income tax bracket.

For purposes of this illustration, we will assume that Jennifer currently does not need the income that could be produced by a traditional investment of $50,000 and uses that amount to purchase a deferred payment gift annuity. Further, she decides that she wants to begin receiving annual income from the annuity when she reaches age 68, by which time she plans to retire. During this 13-year period, when Jennifer does not receive income, the investment accumulates in value on a tax-deferred basis. Then, at age 68, when Jennifer begins receiving income from the deferred payment gift annuity, a portion of it will be tax-free.

The approximate results of this transaction are summarized as follows:

1. Principal amount for deferred payment gift annuity:	$50,000
2. Number of years payment is to be deferred:	13
3. Annuity rate:	8.20%
4. Annual annuity payments beginning in 2032:	$4,100
5. Amount of annual annuity payment excluded from taxes:	$1,566
6. Tax deduction in year of gift:	$21,988
7. Current year tax savings at 32%:	$7,036

*Note that this example assumes a rate of return that may not be applicable when an actual deferred gift annuity is established.

In this example, Jennifer makes an outright gift of $50,000 to Goshen College now, during a time when she is earning and her taxes are higher, and guarantees income in her retirement years when she will presumably be in a lower tax bracket. She has also removed $50,000 from her estate, thus reducing potential estate tax liability, if applicable, upon her passing. Alternatively, Jennifer could have funded a series of gift annuities for $10,000 each year for five years. This planning strategy takes advantage of the fact that payment rates may increase with each new annuity entered into at an older age. A “flexible” deferred gift annuity would allow Jennifer to take the annuity earlier or later than the target date of 13 years.

 

The Charitable Remainder Unitrust

In another hypothetical example, we find Sean Kelly who has just reached retirement age and realizes that several of his investments do not yield the income he desires. Also, since these long-term investments have appreciated significantly in value, he will have to pay a substantial capital gains tax if he sells them.

 

A possible solution to this dilemma is a charitable remainder unitrust that works like this:

A donor irrevocably transfers cash, securities, or other property to the trustee named in the instrument, establishing the charitable remainder unitrust. Goshen College could serve as trustee or it could be a bank, trust company, some other funds manager, or an individual. The trust agreement provides that the trustee shall pay from the trust to the donor (or his spouse or another designated beneficiary) an annual payment, usually for the life of the beneficiary(ies). The amount of the payment is determined by applying a fixed percentage (not less than 5%) to the trust assets, as valued each year.

The payout percentage is agreed upon when the trust is established. The annual income from a unitrust fluctuates as the value of the trust assets changes, but the payout percentage remains the same. The donor may add to the trust in future years. The trust assets pass to (Name of Institution) for use in our work when the donor or his other beneficiary(ies) passes away.

Example:

Sean Kelly has stock he purchased in 1996 for $20 a share. Today it sells for $200 a share. It is paying Sean an annual dividend of 2%. In retirement, Sean needs more income, but if he sells the stock, he will pay at least a 15% capital gains tax on the $180 gain in price of each share since he purchased the stock. Sean’s federal capital gains tax could be as high as 23.8% if he is in a high tax bracket.

Sean creates a unitrust with a 6% annual payout, naming Goshen College as remainderman, and transfers his stock to the unitrust. The unitrust sells the stock and replaces it with assets that allow the unitrust to pay the 6% annual amount.

Advantages to Sean:

• His annual income from the asset has tripled.
• He avoided paying immediate capital gains tax. (If the annual ordinary income generated by the unitrust is below 6%, the difference between the ordinary income and 6% will pass through to Sean as capital gains until all of the capital gain inside the unitrust flows out to Sean over the years.)
• Sean receives an immediate charitable income tax deduction for the present value of the trust remainder, computed based upon his age, current interest rates, and the current fair market value of the stock when the unitrust is funded.
• Sean’s income will increase if the value of the trust grows over time.
• Sean is pleased to know that at his death the remaining trust assets will benefit Goshen College.

Summary

Retirement can be a time in our lives when we travel, make memories with our friends and family, and work on behalf of non-profit organizations that perpetuate our values. We can use this time to reinforce the legacy we wish to leave in this world. If we prepare well for retirement, we can indeed find that it will be the best time of our lives.

Check in with your financial advisor about retirement planning regarding these and other options that can make an impact on the lives of future Goshen College students. The Goshen College Advancement Team can be helpful if you have questions. Connect with us at 574-535-7564 or email at advance@goshen.edu.

 

Todd Yoder
Vice President for Institutional Advancement

Trisha Handrich
Major Gift Officer

Kevin Miller
Major Gift Officer

Adam Graber Roth
Major Gift Officer