What You Need to Know
- Donor-advised funds let clients book a donation for tax purposes and distribute the money to charity later.
- Clients over 50 can make large catch-up contributions to a retirement account.
- Although the money deposited in a 529 plan isn’t a tax deduction, it grows in that lower tax environment.
Your business grows in two ways. You either add more clients with fresh assets or deepen current relationships by bringing in added assets. Sometimes we think “I have all their money.” Here are three ways to deepen relationships by opening additional accounts for current clients. In each case, the client benefits.
1. The donor-advised fund.
Americans are charitable. We give lots of money to worthy causes. There are often tax benefits. Usually this is a reactive process: The charity makes an appeal, and your client responds. Some years are better than others. Here’s how you can help your client’s situation.
How it works: The donor-advised fund is an account structure offered by many major financial services firms through a framework that has the status of a charitable organization. Your client assigns cash or securities to the donor-advised fund. This becomes a charitable contribution for tax purposes. When the client wants to make a gift to a charity, they give instructions and the gift is made. Money can stay in the account in the meantime, being managed as an investment account.
How the client benefits: They can give larger amounts of money even though their favorite charities haven’t made a large request. They can deposit appreciated stock, getting a deduction for the entire amount, without capital gains tax liability. The funds in the account can be actively managed like their other securities accounts. They may even be able to name the account!
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2. Retirement accounts.
Your client has one! They talk about their 401(k) all the time. Maybe they have an orphaned IRA somewhere. Has your client been making regular contributions? Maybe not. Are they over age 50? This could provide an advantage.
How it works: Your client needs to feel that money growing in a tax-deferred environment is more advantageous than money growing in an environment where taxes are paid annually. Your client ideally wants to reduce their taxable income. Retirement plan contributions play a role. If they are over 50 and have missed making contributions, they have the opportunity to make large catch-up contributions. This creates a pool of money that can ideally be managed for the long term.