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Bored in Retirement? Start a 501(c) Charity for Fun and Profit

May 9, 2022, 8:45 AM

Has your retirement turned boring? Do you want to add some zest to your life? Do you want to meet people and have fun? Why not start your own charity or exempt organization?

You have been waiting a long time to earn your right to retire. You’re still alive—whew! You are relatively healthy. Your mind is still on track. It’s a refreshing time, perhaps relaxing, perhaps luxuriating in getting to sleep late, travel, hike, ski, fly, perhaps even bungee jumping. But after six months or a year, it gets to be tedious.

You are the kind of person who is used to being busy—to having a purpose, to having a schedule and plans for the day, targets to reach for the week, things to accomplish. Maybe you even feel isolated. The truth is: You miss all that.

You don’t really want the obligation of a structured job, and you don’t want to start a business. You don’t need the money. You still want freedom in your schedule. What can you do?

Start Your Own Exempt Organization (EO)—501(c)(3) or 501(c)(7)

Naturally, you have heard of 501(c)(3) charities—which, if operated properly, are able to accept tax-deductible donations, while the organization generating the revenue pays no taxes on the revenue from their defined operations.

In just a moment, I will show how you can start such a charity and the substantial tax breaks you can get as a result when you start it up.

Take a look at Internal Revenue Code Section 501(c)(7), which covers clubs. Yes, you can create a club instead of a charity, but donations are not deductible. However, the club can collect dues and fees and funds from events without paying taxes on net cash flow. On the other hand, if your club’s purpose can be defined as “educational,” your club can meet the definition of a 501(c)(3) entity.

This organization reference chart outlines the Internal Revenue Code section for the nature of the organization, forms to be filed initially and annually, and whether donations are deductible.

The one underlying concept when starting any exempt organization is that “no part of the net earnings of [such entity] inures to the benefit of any private shareholder.” In other words, you don’t get to keep any profits generated by your EO.

That doesn’t mean your EO can’t be about something totally fun. You may create clubs or charities for practically any passion you want to pursue. Examples include:

If you don’t have much of an imagination but want to start your own EO, you can find ideas on this three-page list of National Taxonomy of Exempt Entities (NTEE) Codes.

Let’s See Just How to Set Up Your EO

You don’t have to start your EO with high levels of contributions. Initially, you just need enough money to pay for the incorporation fees—yes, they start life as corporations—and the IRS exempt organization application fees. Some states accept the IRS approval; others require separate applications.

It helps to have around $5,000 to invest in your new EO. This will be treated as a tax-deductible contribution once your status is approved.

  • You can use the Form 1023-EZ if you meet certain criteria, which includes not raising more than $50,000 in the first three years. This is ideal if you are developing your interests gradually and attracting volunteers and interested members.
  • The regular IRS application for charities is Form 1023: Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.
  • You will want this application if you plan to donate $100,000 or so per year to clear out your retirement accounts.
  • Form 1024 is the application for anything not falling under Section 501(c)(3): Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code. This form can be used for clubs that don’t meet the Section 501(c)(3) definition.
  • Create your own religion: You are automatically exempt, and no application is involved. Despite repeated audits, it worked for the Church of Scientology—but only actual donations are deductible.

What Are Your Tax Benefits From Creating This EO?

If your standard deduction is too high to itemize, and you are not donating tens of thousands of dollars to your new charity, you won’t get any tax deductions beyond the $300 per person for non-itemizers. You will get to run all the costs of your favorite hobby or pastime through this organization and build a circle of friends to enhance your retirement.

For wealthy people wanting to generate very large tax breaks, here are two ways to do it:

  • You are over age 70 1/2 and you still have high taxable balances in traditional IRAs and retirement plans, undoubtedly facing annual required minimum distributions, or RMDs.
    • Transfer funds from retirement accounts to your IRA.
    • From your IRA, you may make a qualified charitable distribution of up to $100,000 directly to the charity you created without paying any taxes on that distribution. It qualifies as an RMD if your annual requirement is less than or equal to the contribution.
  • You are under age 70 1/2, your taxable income is too high, and you have some available funds to invest in your charity.
    • Make the contribution directly to the charity you have already set up.
    • If it’s not established yet, donate as much money as you like to your own donor-advised fund. This gives you time to establish your EO. Then donate the money to fund your own charity. There are some pitfalls.

Remember, for this to work, you must actually operate your EO. Get people involved as volunteers, fundraisers, members, or grant-writers. Activities must be planned, so even the shyest, most reclusive retiree may be forced to have a good time.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Eva Rosenberg, EA, is the internet’s TaxMama®, dean of TaxMama® EA Exam Course, and the advocate for all enrolled agent examination candidates.

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