When You Give, Give Smart
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 appreci-
ated 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:
1. Escape Capital Gains Tax
Typically, investors will pay between 15% and 23.8% in
Federal Long Term Capital Gains Tax when selling a secu-
rity 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!
2. 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 invest-
ments 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.
3. 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 withdraw-
als from these types of accounts, continue to defer taxation,
and let your investments grow, you can donate appreciated
securities from a taxable brokerage account.
4. 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 donat-
ing 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.
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