Charitable Giving Strategy: The Charitable IRA

by | | Other Cool Stuff, Taxes

Many ER docs reluctantly cut their giving in retirement, to make sure their nest egg lasts. The Charitable IRA is a powerful way to stay financially secure and still benefit charity.

The giving dilemma in retirement

Even if you gave generously during your working years, it can feel scary to give the same amount when you don’t have a paycheck coming in. You want to make sure your nest egg lasts.

Example

Say you’ve just retired at age 60, with $3 million in an IRA. You only expect to need $2.5 million to meet all your goals in retirement without running out of money.

Most people wouldn’t immediately run out and donate the “extra” $500K to charity, no matter how generous they are or what a spreadsheet says. And we wouldn’t advise you to either! At age 60, you hopefully have a long life left. There are just too many unknowns along the way.

Enter the Charitable IRA

Here is a more realistic, and very powerful, strategy for the “extra” $500K. Open a second IRA, transfer $500K into it, and make your favorite charities the primary beneficiary if you’re single, or secondary beneficiary after your spouse if you’re married.

Call the new IRA your “Charitable IRA.”

Access money if needed while you’re alive

You don’t expect to need the $500K, but you can access it anytime if you actually end up needing it. So, there’s no fear of giving your money away now and running out of money later. Heads you win, tails you still win.

Give a lot more to charity in the end

Because you don’t expect to need the money in your Charitable IRA, you can invest it more aggressively for charities’ long-term benefit.

For example:

  • Retirement IRA = $2.5 million invested 60% in stocks, 40% in bonds. Assume this account grows 5% per year.
  • Charitable IRA = $500K invested 100% in stocks. Assume this account grows 8% per year.
  • You end up living another 30 years.

If you left the $500K in your Retirement IRA, it would grow to $2 million in 30 years. ($500K x 1.05^30.)

Not bad at all, but in the Charitable IRA, $500K would grow to $5 million. ($500K x 1.08^30.)

Imagine the impact an extra $3 million would have for your favorite charity!

To learn more about what charitable giving strategies are best for you, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

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