From inflation and rising interest rates to swings in the market, recent headlines might have even the savviest investors worried about their finances. But the key to weathering market volatility is simple: Keep your long-term perspective—these swings are normal and expected. For charitably minded individuals, that advice goes one step further: Keep giving, but make sure you’re giving strategically.
Nonprofits and the communities they serve are still experiencing urgent needs following the pandemic, the humanitarian crisis in Ukraine, and racial and social justice reckonings. Many corporations and individuals are also appropriately examining their giving with a focus on broadening their philanthropic mission—meaning their “usual” bucket of giving could be divided as they step up their giving to different nonprofits.
Supporting more charities and answering timely needs isn’t a bad thing. But with all these unexpected needs—in addition to market volatility and inflation—I’ve heard from dozens of nonprofit leaders who are concerned that their donors won’t be able to keep up the same levels of much-needed support.
If this all sounds overwhelming, you’re not wrong! There are so many needs, but donors like you are already stepping up to make a difference. If you’re ready, you can help answer the needs of both established and new-to-you charities with smart giving strategies, starting with the assets you use to give.
When you’re ready to make gifts, put down your checkbook and definitely do NOT take out that credit card! Certain stocks in your portfolio may still hold significant appreciation after years of market growth—making them a great asset to give to charity. This is especially true for some sectors that respond differently to market volatility.
By donating long-term appreciated stock to charity, you will generally be eligible for two tax benefits—making this a more strategic approach than donating with cash or credit.
First, your donation may qualify for a fair market value tax deduction. Second, you potentially eliminate capital gains taxes that you owe on any appreciation—which may still be significant. Compared with donating cash or selling your securities and contributing the after-tax proceeds, you may be able to automatically increase your gift and your tax deduction. In other words, you can give more and save more.
When a portfolio is over-weighted with equities, vulnerability to market corrections increases. Reducing exposure typically means selling appreciated positions, which triggers a capital gains tax liability.
Rather than selling the appreciated positions to rebalance your portfolio, consider donating a portion to charity. Aligned with the strategy noted above, you may be eligible for those tax benefits here.
Plus, if you are already writing checks to nonprofits, you could use that cash to instead purchase new stocks—or repurchase the same ones and reset your cost basis. Not only does this strategy allow you to continue to invest in a desirable asset, it can also help you with long-term tax efficiency. If the stock continues to increase in value, thanks to the higher basis, you’ll owe less on future taxes if/when you decide to sell it. And if the price sinks as the market continues its normal fluctuations, it’s more likely that you will be able to harvest a capital loss to offset any realized capital gains.
Perhaps you’re committed to supporting your favorite charities when they need you most, but market fluctuations are impacting your portfolio more than you’d hoped. Certain charities can accept privately held interests as well as publicly traded stock—and the appreciation in these non-public assets often make them prime for charitable giving. Do you hold privately held C- or S-Corp shares? Are you preparing to sell your business? Maybe you have private equity interests or restricted stock. And don’t forget your equity compensation as a strategic funding source. Often these income “assets” get overlooked or seem “untouchable.” However, equity compensation is becoming an increasingly important and strategic charitable funding source. Scanning your buffet of funding options can help fuel high-impact giving—consult a trusted advisor for help.
To simplify further, consider a strategic giving vehicle like a donor-advised fund, which is like a charitable investment account that allows you to contribute a variety of assets and invest the balance for potential growth. Charities sponsoring donor-advised funds can often accept gifts of these more “complex” assets and turn them into charitable dollars you can leverage for higher impact giving. Once you fund your donor-advised fund, you have access to a “ready reserve” of charitable funds, allowing you to support multiple charities from a single tax-advantaged gift—all on a timeline that works for you. This also means you can fund your account when it is financially advantageous, creating this ready reserve to continue your giving, even during economic downturns.
If market volatility has resulted in a lower balance within your retirement account, this could be a ripe opportunity to convert a traditional IRA or 401(k) to a Roth IRA. Roth IRAs allow you to set aside after-tax income, so you will incur income tax on the balances you convert from a traditional IRA to a Roth IRA. The deduction from a charitable donation made in the same year can offset the increase in taxable income triggered by the conversion.
For example, if the balance of your traditional IRA dropped to $500,000 during recent market swings, you might consider making the conversion to a Roth IRA now—especially since your tax bill will be lower than if you had converted several months ago. If you’re in the 37% tax bracket, converting $500,000 to a Roth IRA would normally result in a $185,000 tax bill. But when you combine the conversion with a $100,000 tax-deductible charitable donation—as long as you’ve already exceeded the standard deduction—you end up only owing the IRS $148,000.
While you’re considering the conversion—and depending on the size and potential tax triggered by the conversion—you could consider frontloading multiple years of giving into a donor-advised fund in the year of the conversion. This strategy is sometimes called bunching. As the market recovers, not only will you be on the tax-free side of the equation with your newly characterized Roth IRA, your initial tax-advantaged charitable gift also has the potential to grow, giving you more funds to support your favorite causes in the future.
With preparation and planning, you can be the hero to your favorite charities by continuing to support them during market volatility—especially when others have to pull back on their annual giving. According to GivingUSA’s annual report on American philanthropy, charitable giving has consistently increased since 1980—only decreasing a handful of times corresponding with bear markets or recessions. No matter how the market behaves, working with your advisors and leveraging these giving strategies can help you weather the storm and all the while still making more of a difference.
The tax information provided is general and educational in nature, and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice.
Head of Fundraising
Karla Valas leads fundraising for Fidelity Charitable, the nation’s largest grantmaker. The expertise from her team of Charitable Planning Consultants helps advisors and companies have more sophisticated financial planning conversations that incorporate charitable strategies, such as donor-advised funds. Ms. Valas has expertise in complex assets and previously led a team of attorneys who facilitate thousands of charitable donations of appreciated private company stock and other nonpublic assets annually. She a B.A. from Mount Holyoke College, a J.D. from New England Law and an LL.M. in Taxation from Boston University School of Law. Ms. Valas is admitted to the bar in New York State and the Commonwealth of Massachusetts.
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