The Impact of Charitable Giving on Roth Conversions

Hey there, this is Craig Weir again. I just thought I'd shoot a quick video, just some information for things that you should consider when you're, when you're looking at making charitable donations and doing Roth conversions, or if maybe the thought hadn't occurred to you, you're considering doing Roth conversions, why you maybe would want to think about doing charitable contributions alongside those and kind of what all the some of the different factors that kind of should be in your mind and in the background as you're trying to decide how much Roth conversion to do. So let's just start at the real basics. And by the way, this is going to be a fairly basic introduction. I do have a complete webinar that we're planning on doing about Roth conversions and charitable contribution strategy. So if that link is, is in this video below that, we've already done it. If it's not, just keep watching back and we'll get that out and you can go check it out. Check out that webinar. So here's the deal. When you have a large IRA or any size IRA and you get to the age where you have to start taking required minimum distributions, that those RMDs create taxable income every year to you. And Sometimes when your IRA's 401ks are big enough, they end up causing a big tax problem and you end up paying a lot more tax over your lifetime because that balance just grows and grows. The RMDs compound and get bigger and bigger and bigger. It'll save you some time if not charitably inclined. If you don't already give away to charity and it's not a big deal to you, then you probably don't even need to watch the video because you're still giving money away and you're better off to pay the tax and keep the money. Unless you do have a charitable intent, I guess we call it in the industry. Right. So with that being said, what do I need to think about? Well, I'm just going to kind of shotgun you with a few ideas. So a lot of people already understand that when you get to age 70 and a half and older, you can use something called qualified charitable donations to minimize the taxable impact of those required minimum distributions. And so let's say you have a million dollar IRA and your first year required minimum distribution would be $40,000. You could actually set up a qualified charitable donation and I'm just going to call it a QCD from now on. And you have to do it the right way. So the money has to Go directly from your custodian to the charity, and it takes away. It's an immediate deduction, comes right off, and you can lower your rmd. That way it less taxable income it offsets. So let's say you make a $20,000 charitable donation and your RMD is 40. We only get taxed on the $20,000 difference between the 40 and the 20 that you gave away. So that tells you at the very beginning then that, okay, if I'm going to do Roth conversions, then there's a strategy involved whereby I have to calculate how much of my IRA should I convert and how much should I just leave in the IRA, because I can use these QCDs, and if I'm going to be giving money anyway, then why pay tax on it? We just like to calculate how low of an IRA balance should that be so that. That Iraq generates the amount that you want to be able to give to charity. So it's calculation on the front end that we do for our clients, and you could do that yourself if you're good at the math on it. So you're, look, you're, you're trying to solve for how much money can I leave in the IRA that I could use QCDs to pay those on? You got to remember to put a rate of return on it, inflation, those kinds of things as well. So that's one way to do it, is just don't convert everything, convert down to a sum of money that you can use for qcd. So you have to. You have to know a couple things, right? You need to know, how much do I plan on giving away? How many years do I want to plan on that giving, whether it's for me and my wife's lifetime or just for your lifetime, whatever the case may be. You know, in anything we do in life, there's planning. I mean, anything in life we do that planning is involved. You have to make some assumptions. I mean, if I want to hop in motorhome and go to California, I got to make some assumptions. If I want to plan for a kid's college, you got to make some assumptions. If I want to plan to buy a house, I got to make some assumptions no different than Roth conversions, and yet I see a lot of negative comments. I'm not going to do the conversion. There's too many assumptions involved. Well, so we never take the trip, we never do the college, whenever. I mean, it's kind of ridiculous to look at it that way, but there are some assumptions, and I've told you what they are. So that covers the QCD element, right? So, but that's a really big point because you might get away with only converting 750,000 instead of the full million that I use in the analogy to begin with, you may leave 250,000 and some of that has to do with how old you are, how many years until all the RMD start. So like I said, I'm trying to keep it basic here, but there's a lot of elements that go into it. If you're good with math, you understand all this stuff, I'm sure you can come up with, you know what that number is. There's another charitable strategy that you can use alongside your Roth conversions also, and that's through the use of donor advised funds. And you can go to the Website Craig Weir Wear.com look at check out podcast and I've done a couple of podcasts about donor advice funds and charitable giving. You can check those out there for probably a lot more information. But the, the easy part of it, you can make a lump sum charitable contribution to a donor advised fund. This donor advised fund is a fund that you are the donor to. You set it up at a Fidelity or Schwab or Vanguard or one of those places and now that lump sum is available for the rest of your life to be able to write checks off of, to go to any 501 organization that qualifies for that. So let me give you some practicalities to it. Let's say you know that you're going to be giving 20, $30,000 a year away for the rest of your life and for your wife's life. Right. Or spouse's life. Well, if you do the math on it and you figure out I want to minimize the tax now on these Roth conversions. So you could do over one year, over a couple of years you could do large contributions to a donor advised fund and offset the tax consequence from doing conversions. So we put some real life to that too. Let's say you want to have a half a million dollars in a donor advised fund that you can use and direct the rest of your life by writing checks off of it to these charities in the future. Well, let's say you made a $250,000 contribution to that donor advised fund today and let's say at the same time you were going to be converting 400,000. Well, that 250 that you wrote to the donor advised fund comes off of the 400 as a, as a direct deduction. And so now you're only going to pay tax on that extra 150,000 of that $400,000 Roth conversion. Now, none of these charitable strategies work if you know you're not, I mean, if you're not already charitably inclined, but if you know you're going to be giving money away and you know that you're going to be making Roth conversions that are going to take you to a higher tax bracket, this is a great way to pay a lot less tax and to get the money converted sooner. Now obviously the way this works best is you have other assets that you can use for taxes. I mean, to pay the taxes on the conversions and that sort of thing to, to take the money from an ira, pay the taxes from the IRA and do a donor advised value contribution. But if you have plenty of money sitting over in a brokerage account and you know you're going to give money anyway over your lifetime, it's a way to take that money, make the contribution to the donor advised fund, do your Roth conversion on this side of the spreadsheet and you end up saving a lot of money in tax. There's also another, a tool called a charitable remainder trust. And that's where you put money into a trust, it you get to take a deduction for it and somebody you or a beneficiary gets income over the rest of your lifetime and then at that person's death or your death, then the money goes to a charity. So you know, in two cases, in the first case in the qcd, you're given money today in the donor advised fund, you're putting money aside today for donations in the future. And for the CRT that you're a remainder trust, you're putting money in an account and somebody that you know is getting income and then the charity gets the money later. So three different strategies that can all be built into a Roth conversion strategy to show you how to pay less tax on the IRA over your lifetime and accomplish some other things as well. So like I said, we got a full webinar that we're going to do that's got, that's going to go into examples and case studies and all kinds of cool stuff. So if the link to that is below, then check it out. If the link is not below, then I haven't done it yet, we haven't published it yet. As of when I'm making the video, it is not done yet, but we have it scheduled to do here pretty, pretty soon. So hope that's of a little bit of help to you and that it kind of begins to peel back one of the layers of the onion for you to think about. Oh, yeah. I do charitable contributions, so here's some different ways that can play out. All right, take care. Have a great day.