Posted by Jessica Hinks | Dec 19, 2019 | Retiring Well
Many retirees wish to continue their charitable gifting habits for as long as they are able. It is a noble goal!
Some people may gift regularly to their local church, which is known as tithing. Traditional church values suggest that you should tithe 10% of your income. I am not a theologian and am not likely to properly explain how 10% became “the number.” If you want to know more about the origination of the Christian principle of tithing, The Gospel Coalition has a helpful article.
For sake of simplicity and clarity, this blog post is directed to those who currently tithe 10% of their income and want to extend that practice into retirement.
Here are my thoughts on how to tithe on different types of retirement income:
1. Tithing On Your Fixed Income
When you retire, you may have various kinds of fixed income like social security, a pension, or rental income. A simple solution is to tithe 10% of your total fixed income.
From my experience, most tithers base their giving on their gross (before-tax) income. In retirement, you may wish to continue this practice.
However, you may have a different conviction and want to tithe on your net (after-tax) income. If you have tax withheld from your fixed income, you can check what arrived in your bank account that month and calculate your tithe based on that value.
2. Tithing on your portfolio income
In addition to fixed income, many retirees have investments that generate dividend income (money companies pay you for owning their stock).
There are 2 main conflicting opinions on this matter:
A. You should tithe 10% of your portfolio income just as if they were wages you earned. A true “first fruits” approach.
B. You already tithed on this money before you invested it. Therefore, you are not expected to tithe on money that it earns.
My opinion is that you should tithe based on personal conviction. I cannot say which is correct for you.
However, I expect that when you read the two opinions, one felt more “right” to you than the other.
3. Tithing on your retirement account distributions
Retirees often distribute from a retirement account. This is different than a taxable account with dividend income, as part of this account was likely withheld from their paychecks during their working years.
Reference the image below: this person worked to earn wages, tithed on that wage, and paid tax on that wage.
Over time, he was able to have $30,000 deducted from his pay and put into a retirement account (Original Contributions). Then, the original $30,000 earned $70,000 more from dividends and capital gains. The now-retiree tithed on the original $30,000 but has not tithed on the $70,000 of earnings.
Throughout your retirement, you will take money from your retirement account. Hopefully, you can just take Earnings. However, it is very possible that you will need to pull Original Contributions towards the end of your retirement. How should you view this income?
Here are a few perspectives on how you can tithe (or not) on this money:
A. As you distribute money, you should tithe 10% of it, even once you get down to Original Contributions you already tithed on.
For example, if you take $2,000 per month from your IRA, you should tithe $200. This is easy to calculate and requires no record keeping.
B. You already tithed on this money. Therefore, you don’t need to tithe on what it earned (like point #2).
C. You can review your statement to find out what your Original Contributions are, in order to calculate and tithe only on the Earnings.
You tithe 10% of each distribution you take, while your account is still full of Earnings. Years later when your account might be down to your Original Contribution level, you stop tithing on the distributions. This is still fairly easy to calculate but will require a bit of record-keeping.
How to save BIG on taxes (no matter how you choose to tithe)
Generally, when people tithe or make donations to charities, they give money that they already paid taxes on. This becomes a big deal for retirees.
A retiree may wish to donate $10,000 each year to a charity. They do not have enough fixed income to cover this, so they distribute $10,000 extra from their IRA.
Now they have to report $10,000 of additional taxable income, and they owe $2,000 more in taxes (estimated). So, they are really giving away $12,000 instead of $10,000… But only $10,000 is making it to the charity.
If you are over age 70 ½ and give to charity DIRECTLY from your IRA, YOU OWE NO TAX. This is called a Qualified Charitable Distribution.
If you are of that age and tithe to the church from money in your checking account, you will NOT get this benefit. It MUST come directly from your IRA. Talk to your custodian or financial advisor to get the right paperwork to make this happen. It is so worth it!
Be sure to check out what the IRS says about properly reporting this on your taxes as well. I have other tips on tax efficient giving HERE.
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I am very interested in hearing other perspectives on tithing! I hope this at least gives you things to consider as you approach retirement and want to maintain your habit of giving.
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