Charitable giving is a popular strategy among the wealthy for diminishing their tax payments. But this strategy doesn't just have to be for the Michael Dells and Kim Kardashians of the world. Wouldn't you like to reduce your taxable income and save money too?
Intelligent real estate investors, just like you, can use charitable giving too. But even savvy investors don't always know that they can make charitable gifts from retirement accounts.
The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold. Whether you want to donate money from your 401(k) to a cause close to your heart, save on your taxes or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).
Why You Should Designate Your Retirement Funds for Charitable Giving
Ultimately, it would be best to consider designating your retirement fund for charitable giving to reduce your taxable income and save money. The tax break is why many highly wealthy individuals donate in large quantities. Sure, many of them may be philanthropic at heart, but there is also a distinct tax advantage to making donations. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes to extract his pound of flesh and collect tax bills.
Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Anyone can take advantage of this deduction. Generally, the credit is figured by taking the market value of an item or the actual amount of cash donated, then subtracting the percentage of your tax bracket.
This strategy can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.
What Options You Have for Giving to Charity
Some of these may already be familiar to you. Others are less obvious. Here are some, but not all, of the many methods you can use to donate funds to a charitable cause:
⦁ Real Property Gifts (includes real estate, stocks, etc.)
⦁ Trusts (Charitable Remainder Trusts, Charitable Lead Trusts, and more)
⦁ Charitable Sales (purchases will benefit a charitable organization or purpose)
⦁ Deferred or Traditional Charitable Annuities (the donor receives a tax deduction and a fixed income for the remainder of their life)
⦁ Life Estate Gifts (allows donors to claim a charitable deduction for the remainder value of real property donated to charity)
⦁ Retirement Plan Asset Gifts (passes the retirement plan assets to a charity)
⦁ Life Insurance Gifts (name the charity as a beneficiary, and it may reduce the donor's taxable estate)
Which Options Are the Most Beneficial?
Life estate gifts, retirement plan asset gifts, and life insurance gifts are the most beneficial options.
While any of the previously mentioned options are undoubtedly beneficial and generous, intelligent investors may be wondering which will benefit their bottom lines. You may be surprised to learn that the final items on the list are among your most robust and lesser-known gift choices.
Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations need immediate cash that these donations do not address. They are nonetheless useful for the organizations--and you.
Ways to Give to Charity from Your 401(k)
Option 1: Donate Directly from the Plan
You can liquidate an asset (or several) held by your plan, then directly donate the funds to the nonprofit group or cause of your choosing.
Option 2: Name a Charity as a Beneficiary of Your Plan
Naming the charity of your choice as a beneficiary works the same way as designating any other beneficiary. However, this option has the advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is a more intelligent expense than passing those same funds on to your heirs. Your heirs would have to pay the taxes, but the charity does not.
Key Takeaways for Effective Retirement Planning and Charitable Giving
Charitable giving is a popular and effective strategy to reduce your taxable income and save you money. One strategy that most people don't know about is the ability to make charitable gifts from retirement accounts.
It would help if you considered giving to charity from your retirement account for the following reasons:
- Reduce your taxable income
- Receive a Charitable Gift Tax Credit
- Pay less in taxes
The tax benefits of charitable giving are multiple. It may result in you pocketing cash when tax season rolls around.
You have a lot of options available to you, but one of the most beneficial options is to give from your 401(k) by:
- Donating directly from the plan
- Naming a charity as your beneficiary
This strategy will reduce the tax burden on your estate and may save your heirs a hefty tax bill down the line.
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