How to be charitable, and good to yourself, too

By SCOTT BURNS Special to the Times
Published April 24, 2007

Charitable gift funds are more than a toy of the nearly rich. They offer a surprising advantage to retirees with ordinary incomes. Using a charitable gift fund, a retired couple can increase their giving or increase the amount they spend on themselves. Or they can do a bit of both.

Follow me while I show you what can happen when a retired couple make a charitable gift.

Suppose you are drawing Social Security benefits and covering additional expenses by making withdrawals from your IRA account. At year-end you withdraw $1,000 for a charitable donation.

What happens?

The charity gets your check for $1,000. But the withdrawal caused your taxable income to rise by $1,000. Unless other deductions total at least $10,700, that $1,000 won't provide any tax benefit. Many middle-income retiree households don't have enough deductions to itemize.

So your tax bill will increase by your marginal tax rate. For many retirees that's 15 percent, or $150.

Increasing your income by $1,000 may also cause some of your Social Security benefits to be taxed.

This doesn't start at lofty incomes. For example, a couple with $36,000 in Social Security benefits can have only $14,000 of income from other sources before triggering Social Security benefit taxation.

The next $1,000 of income they receive will cause $500 of benefits to be added to taxable income. This will increase the income tax bill by another $75, a total of $225.

Whether you are a Republican or a Democrat, I think you'll agree that's not how it's supposed to work. That's the mess both parties have made of our tax system.

Fidelity Investments started the first charitable gift fund 16 years ago, allowing donors to give cash or securities, get an immediate tax deduction for the value of their donation, and have the money managed by Fidelity.

Fidelity charges a fee for operating the fund, as well as fees for managing the actual assets, but donors are saved the cost of establishing a personal foundation.

The Fidelity CGF now boasts more than $3.5-billion in assets contributed by about 39,000 donors. Many financial services companies have established their own charitable gift funds, with Vanguard and Charles Schwab being the next largest at $1.25-billion and $1.06-billion, respectively.

Once a donor account is established, donors can instruct the fund to issue checks to any qualified charitable organization.

The minimum initial donations for the Fidelity, Vanguard and Schwab gift funds are $5,000, $25,000 and $10,000, respectively.

Charitable gift annuity

Q: Your column is usually lukewarm about annuities. What do you think of charitable gift annuities, in which you sign a contract with a nonprofit organization to get a lifetime income in exchange for a gift of principal?

K.V., Cambridge, Mass.

A: One problem with discussing annuities is that a single word covers all varieties of contracts - and the variety of contracts is growing.

Charitable gift annuities are a most interesting option, particularly for older retirees. They provide an immediate tax deduction that is reduced by your life expectancy and a reasonable lifetime income.

If the charity is well-financed - such as a large college endowment - and your intention is to give to that institution upon your death, you can have income while you are living and enjoy the pleasure of having given while still living.

Please don't read this as a blanket endorsement of charitable gift annuities. Before you commit, you should have the annuity reviewed by a fee-only financial planner.

I think immediate life annuities have a role in retirement and financial planning, particularly for people who don't have pensions when they retire.

I also think tax-deferred fixed annuities can be useful if you are quite careful about the terms and duration of the contract. The annuity products that I have yet to find useful are tax-deferred variable annuities, which have self-defeating high expenses, and equity index annuities, another oversold and costly insurance product.

Scott Burns has been a financial writer and editor for more than a quarter of a century. Questions about personal finance and investments may be sent to scott@scottburns.com those of general interest will be answered in future columns. His Web site is www.scottburns.com.

On the web

Learn more at these sites

- www.charitablegift.org Fidelity Gift Fund

- www.vanguardcharitable.org

- www.schwabcharitable.org

- Fire-calc Portfolio Survival Calculator: firecalc.com/firecalc.php

- Vanguard Life Expectancy & Probability Calculator: flagship. vanguard.com/VGApp/hnw/planningeducation/retirement/PEdRetPicLong RetireContent.jsp

[Last modified April 24, 2007, 00:20:23]