3 Ways to Donate from an Investment Account
3 Ways to Donate from an Investment Account
By: Stacey Nickens
There’s nothing quite like waking up on Christmas morning, presents stacked high under your tree. However, the giving season is never quite complete without giving back to the broader community. This year, consider three different strategies for giving from your investment accounts. These strategies can not only help those in need, they can also help with your tax planning and portfolio management.
1. Give back through a Qualified Charitable Distribution (QCD). Most years, investors over the age of 72 are required to take a distribution from their tax-deferred accounts. Instead of taking your required minimum distributions (RMDs) for personal use, you can instead opt for a qualified charitable distribution (QCD). Investors above the age of 70.5 can direct up to $100,000 of their IRA distributions to a qualified charity. These charitable distributions satisfy your RMD requirement while also reducing your taxable income. As you do some year-end portfolio rebalancing, giving a QCD can also help you to reduce the size of holdings that have grown too large or become overvalued. Once you’ve liquidated all or part of these positions, you can steer the proceeds to a charity through a qualified charitable distribution. Notably, you also do not have to itemize your deductions in order to take advantage of a QCD.
2. Donate appreciated securities. Selling appreciated securities in a taxable account can result in a significant capital gains tax bill. However, donating securities does not result in capital gains taxes for you. Moreover, you can deduct the full value of the securities at the time of donation. In order to qualify for this deduction, you must have held the securities for at least one year, and the value of the deduction cannot be larger than 30% of your adjusted gross income. However, even if the value of the deduction is greater than that threshold, you can rollover the rest of the deduction for up to five years. Before donating appreciated assets, it is important to consider whether 2022 is the best time to do so. It may make sense to wait to donate these assets if you do not plan to itemize deductions for the 2022 tax year or if your taxable income will likely be higher in future years.
Beyond the above tax benefit, donating appreciated securities can also help you clean up concentrated positions in your portfolio. For example, a year-end review may show that your portfolio is overly exposed to the technology industry. You could thus donate appreciated technology stocks in order to redistribute your portfolio’s weightings.
3. Donate appreciated assets through a donor-advised fund. In this strategy, you contribute cash or investments to a fund that the IRS views as a charity. You then manage the fund’s investments and donate to your desired charities over the course of time. While the donations may not be dispersed right away, you can still deduct the amount contributed to the fund in the year of the contribution. Contributing to a donor-advised fund can thus make sense if you want to reduce your tax bill in one year but spread out your donations over a series of years. Like above, if you donate long-term securities, you can deduct that donation as long as it’s less than 30% of your adjusted gross income. As is also the case above, a donor-advised fund allows you to unload appreciated securities. However, a donor-advised fund may also make more sense for non-publicly traded assets. Charities may not be able to directly liquidate these non-public securities; however, donor-advised fund administrators will likely be more qualified to do so. They can then direct the proceeds to charity.
