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 makes 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. That's a good thing.

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 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.

It can get worse.

If this couple withdraws more than $26,000 from their IRA, each additional $1,000 withdrawal will trigger taxation of $850 in Social Security benefits. They will have to pay $150 on the additional $1,000 and another $127.50 on the $850 in Social Security benefits, a total of $277.50.

Giving $1,000 to charity can cause the retired couple to pay an additional $225, or more, in taxes to the federal government. 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 with our tax system.

The table below assumes a retired couple with $36,000 in Social Security benefits. It also assumes additional income from IRA accounts. Like many retirees, this couple doesn't itemize deductions. Charitable giving adds to their taxable income and provides no tax benefit.

Give More, Spend More with a Charitable Gift Fund
This table compares the income tax bills and after-tax, after-charitable-giving income of a retired couple with $36,000 in Social Security benefits. It assumes the couple will give $5,500 a year to charities, whether it is from income or from a charitable gift fund. It also assumes the couple has an IRA account from which they withdraw at a 4 percent annual rate. As a consequence, when they make their $66,000 charitable gift fund donation, their annual withdrawal declines by $2,640. This decline is reflected in the second table.
Before creating gift fund
IRA Income	Charity		Fed. Inc. Tax		Spendable		Increase in tax bill (Tax Rate)
$20,000	$5,500		$ 413		$50,087		na
$30,000	$5,500		$2,324		$58,176		$1,911 (19.1%)
$40,000	$5,500		$5,099		$65,401		$2,775 (27.5%)
$50,000	$5,500		$7,874		$72,626		$2,775 (27.5%)
After creating $66,000 charitable gift fund that donates $5,500 a year
IRA income		Charity		Fed. Inc. tax		Spendable		Increase
$17,360		By CGF		$ 14		$53,346		$3,259
$27,360		By CGF		$1,589		$61,771		$3,595
$37,360		By CGF		$4,364		$68,996		$3,595
$47,360		By CGF		$7,139		$76,221		$3,595
Source: author calculations, done with TurboTax

They can enjoy lower taxes and greater spendable income by making a one-time donation of $66,000 (or some other amount) to a charitable gift fund. Once established, they make annual gifts from the fund, not from income. For this example I've chosen an annual gift of $5,500. Once they have made the gift, their nest egg will produce less income, lowering their income tax bill. As a consequence, the retirees may fulfill their desire to donate $5,500 a year but have as much as $3,595 more to spend (or give) each year--- because they created a charitable gift fund.

The retired couple, in other words, can donate $5,500 and spend an additional $3,595 a year on themselves. They can give both benefits, $9,095, to charity. Or they can do something in between.

Some readers may think withdrawing $5,500 from a $66,000 charitable gift fund is excessive--- it reflects an 8.3 percent withdrawal rate. The choice is deliberate. Using Bill Sholar's www.FIRECalc.com, I found that a gift fund portfolio that is at least 66 percent equities has about a 60 percent chance of surviving for 15 years.

If you visit the life expectancy probability calculator on the Vanguard website, a 65-year-old man has about the same chance of living for 15 years--- so the odds are about equal that a life (or death) event will cause charitable giving to be re-examined.

Sidebar on charitable gift funds

Fidelity Investments started the first Charitable Gift Fund sixteen 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 over $3.5 billion in assets contributed by 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. You can learn more at www.charitablegift.org (Fidelity Gift Fund), www.vanguardcharitable.org and www.schwabcharitable.org.

On the web:

Fire-calc Portfolio Survival Calculator Vanguard Life Expectancy & Probability Calculator