Recently I met with a couple who is retiring this year and we’re setting up their retirement income withdrawal strategy. One of the accounts that’s a part of their strategy is a non-retirement account.

What is a Non-Retirement Account?

This is a common type of account with ETFs or funds or stocks. It could really contain any type of investment when any interest or dividends that are created that year are taxed that year as well. When an investment is sold, it’s either sold because it went up in value and there’s a gain that you pay tax on, or it went down in value and there’s a loss that you might be able to write off on your taxes. 

So in the situation with the retiring couple, a lot of their investments had a long-term gain tied to them. For example, they bought one individual fund for $50,000 and now it’s worth $100,000, which is great! But if they sold it to help fund their retirement income plan, they’d end up paying $7,500 to $10,000 in taxes on that single fund that had appreciated. Over the course of a few years, it could really add up to quite a bit that they’d have to pay in tax. And in retirement, for them, every dollar matters, just like for you, every dollar matters. So implementing a tax-saving strategy helps make a big difference in the success of their plan and maybe yours, too. 

The other key in this scenario is that the couple is charitable and they want to continue to give. They plan to give between $5,000 and $10,000 a year during retirement. Usually they give cash and they give it straight to the charities of their choice – in this case, they give to their church.

Now here’s the idea that we thought about. What if rather than give cash, instead we move the money to a donor-advised fund.

What is a Donor-Advised Fund?

A donor-advised fund is technically out of your estate, but it’s still under your control. You can designate the money to go to different charities when and how much you want. You can even give to multiple charities out of the same fund and set up monthly giving, just as you would from your cash account. 

With this couple, we looked at their non-retirement account and inside, there were all these different funds and ETFs. From the fund that had appreciated from $50,000 to $100,000, we took $10,000 and moved that to a donor-advised fund. Once they have a lump sum in, they set up autopilot to send a certain amount monthly to the church. Now instead of paying $1,500 to $2,000 in taxes every year, they pay zero tax on that transaction. Continuing to give monthly to the church, rather than one large donation, helps the church to budget as well.

To sum up: the couple gives to their donor-advised fund. Charitable giving is set up on autopilot. The church gets the same amount, at the same time, that they were always going to receive. All in all, the only person who gets cut out of this scenario is Uncle Sam.

This is just one example of how your five mini plans make up a much larger retirement plan and how they must work together to see great success. In this case, it was the income plan, the investment plan, the tax plan, and also the legacy plan – the legacy and charitable plan working together. 

If you’re getting close to retirement, here are some other links that may be helpful to you: