By Chris Bishop, CFP®
My job as a financial planner is to ensure my clients manage their resources effectively. One aspect is to make sure they give to charities in the smartest possible way.
For many of my clients, the strategy of donating appreciated securities (stocks and mutual funds) from a taxable brokerage account is the best way for them to support the organizations they care about instead of writing a check. There are a number of advantages to this strategy.
Escape Capital Gains Tax Typically, investors will pay between 15% and 23.8% in Federal Long Term Capital Gains Tax when selling a security held for more than a year, and state income taxes may increase this percentage even more. By donating the security to a qualified 501(c)3, they avoid having to pay this tax!
Reduce Risk and Increase Diversification Investors will, at times, hold large positions in individual stocks exposing them to increased risk since a downturn in that stock can greatly affect their financial well-being. Think Enron. These positions can result in much more volatility or large fluctuations in the value of their investments causing emotional stress. Often these stocks are also highly appreciated. By using these individual stocks to make their charitable donations, they can reduce exposure and decrease risk over time. Assuming they have positions in other diversified investments, this donation will also improve diversification and hopefully reduce any stress they may experience due to volatility.
Reduce Retirement Withdrawals Once you retire, you may still have a charity that you wish to support, but withdrawals from a pre-tax retirement account such as a 401(k) or IRA are taxed at ordinary rates. This likely means incurring taxes of at least 10% on the withdrawals, but in many cases much more. In order to reduce withdrawals from these types of accounts, continue to defer taxation, and let your investments grow, you can donate appreciated securities from a taxable brokerage account.
Appreciation of Charitable Dollars Imagine giving $1,000 per year to a charitable organization. Over a ten year period, you will have given $10,000. Now imagine you have a mutual fund worth $8,000 growing at 6% each year and you designate this fund for your charitable donations. This asset will be able to provide you with the same $1,000 donation per year for ten years. This example assumes constant investment returns, and the outcome can vary based on various factors.
Donating appreciated stock is an excellent strategy to consider. Consulting with your financial advisor or tax professional to examine your specific situation is always recommended before making a final decision. It is also recommended to ask the organization you are supporting if they can accept securities donations. If you decide donating securities is right for you, it is best to work through the process with your financial advisor who will make certain all the correct steps are taken to ensure a smooth transaction.
Chris Bishop graduated from Virginia Tech with a degree in Business Information Technology in 2001. He had a 17-year career in the field of Information Technology before changing careers to financial planning. He is a CERTIFIED FINANCIAL PLANNER TM professional working for Partners in Financial Planning – a Fee-Only Comprehensive Financial Planning Firm serving clients nationwide (partnersinfinancialplanning.com). Chris serves his church by leading a personal finance ministry and has worked with Renewanation in regards to the Virginia Education Improvement Scholarship Tax Credit Program.
Volume 9 Issue 2 - The Renewanation Review