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Generosity pays off in a Roth IRA conversion

Maximize the tax breaks of strategic giving while converting to a Roth IRA.

If you’re passionate about supporting meaningful causes and ready to convert to a Roth IRA, strategic giving can help you reap big benefits.

Roth IRAs are quite popular with pre-retirees. That’s because, unlike a traditional IRA, Roth IRAs have no required minimum distribution (RMD) rules and allow you to withdraw earnings tax-free in retirement. Under the SECURE Act, a surviving spouse or other heirs can even let Roth IRA funds accumulate tax-free for up to 10 years after the death of the IRA owner.

There is one catch, however: Converting from a traditional to a Roth IRA is considered a taxable event, meaning you must pay taxes on the amount you’re transferring.

Fortunately, you can offset some of that taxable income while fulfilling your philanthropic goals.

If you’re planning to make donations in future years, consider condensing your contributions into a larger-than-usual gift the same year you complete your IRA conversion. The greater the donation, the more you can itemize and deduct, giving you a substantial tax break when you need it most.

You can level up your strategy by opening a donor advised fund (DAF). This will allow you to receive an immediate, full tax deduction as soon as you make your gift – along with the freedom to choose how and when your gift is distributed over time.

Another standout benefit to DAFs? Because the money you donate to your fund is invested, you’ll have the potential to grow your contribution tax-free and ultimately amplify your impact.

You can claim an even higher charitable tax deduction by teaming up with your advisor to donate appreciated stock to your DAF, since donated stocks that you’ve held for at least one year are valued at their full fair market price. You can also reduce a concentrated equity position through a DAF, helping rebalance your portfolio and ensure it remains in line with your financial plan.

The difference a DAF makes
  Roth conversion without DAF offset Roth conversion with DAF offset
Roth conversion amount $500,000 $500,000
DAF charitable contribution $0 $100,000
Taxes paid to IRS $185,000 $148,000
Assuming a 37% tax rate and $100,000 fully deductible charitable contribution

Contributing to charity – particularly through a DAF – the same year you convert from a traditional to a Roth IRA is nothing short of a win-win. You get to save on taxes and invest in meaningful causes. You’ll just want to work with your advisor to ensure you have sufficient non-retirement assets to cover the leftover costs of the conversion.

Contact your advisor to learn more.

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