Consider a Charitable Income Agreement
As record numbers of individuals enter their retirement years, many are discovering that IRAs, 403b plans, and other retirement plans, coupled with Social Security, will not provide adequate income.
Some have found it harder to set aside adequate savings when they are facing towering education expenses, skyrocketing housing costs, and increased tax liabilities.
Originally, IRAs promised tax-deferred investment and growth. They also promoted the idea that by setting aside tax-deferred dollars today, you would be able to withdraw those funds when you retire with a savings, because your tax bracket should be significantly reduced once you stop working.
But 2 factors detract from the original plan. First, many retirement plans have performed very well over the years with significant gains in value. Since they were funded with pre-tax dollars, these funds will be subject to income tax as they are withdrawn. Secondly, federal, state, and local tax burdens are significantly greater. The result is that many now face tax liabilities they never dreamed of when they began saving years ago.
Other factors may be adversely affecting your plan:
- You may be paying sizable income taxes before putting away part of your remaining net income.
- There may not be enough time to properly manage the investment of your nest egg.
- The funds are attachable by creditors.
- Upon your death, the funds remaining in your estate may be subject to tax.
Fortunately, there are still some very good charitable solutions to help solve these problems. A Charitable Income Agreement can provide retirement income, create a current income tax charitable deduction, and assure a future gift to ministry.
Case Study
Let us consider an actual case. Frank is 37 years old and wants to set aside more for retirement income than traditional planning tools allow. He also wants greater flexibility, without penalty, should he wish to start receiving income earlier or later than the law requires under traditional retirement plans.
He establishes a Charitable Retirement Income Trust with the understanding that he will contribute $5,000 per year until he is 65. The annual contribution he plans to make is entirely flexible, he can transfer more or less, or even skip a payment if he chooses. And, he can begin receiving income in the year of his choice.
Assuming Frank continues the same commitment each year, he will contribute a total of $140,000 over the next 28 years, generating approximately $41,500* in combined income tax deductions. If Frank lives to normal life expectancy, and assuming a reasonable projected asset growth, the income trust will pay him approximately $530,000* during his retirement years.
Using the tax savings created by his contributions to the trust, Frank can fully replace the value of the assets in the trust for the benefit of his children without estate tax concerns. In the meantime, his retirement assets cannot be attached by creditors.
When Frank dies, his chosen charity will receive the trust remainder, estimated to be nearly $450,000*, and his children will receive their assets in cash, free of income and estate taxes.
What This Means for You
By entering into a Charitable Income Agreement, you can:
- Gain income tax advantages
- Increase your cash flow in retirement years
- Offset other income taxes you may be paying
- Reduce your estate taxes
- Increase distribution to beneficiaries at your death
All the while you are caring for the needs of your family. You are helping secure the future of the ministries you choose to support and helping others—thanks to your careful planning.
We have prepared a special planning report, A Guide to Charitable Income Agreements, that outlines the advantages of establishing a charitable income agreement. This report is yours without cost or obligation.
*Deduction based upon current interest assumption; growth calculated with 7% total return, assuming 5% payout at retirement.
