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Considerations When Trying To Balance Charitable Giving and Roth Conversions Thumbnail

Considerations When Trying To Balance Charitable Giving and Roth Conversions

Investment Planning Tax Planning Retirement Planning Roth Conversions

One of the most underappreciated aspects of retirement accounts is their flexibility.  While they are designed to provide a tax-efficient means to save for retirement, there is a lot that you can do once the money is in your IRA or 401(k).   

For many people, the traditional retirement savings approach is simply a shifting of taxable income—you defer some of your income in your high tax bracket years (your peak earning years), then start using that money in your lower tax bracket years (after you’ve retired).  Roth conversions take this one step further by placing the money into a Roth IRA, which allows the money to grow tax-free for the rest of your life.  And any money leftover when you die is passed onto your heirs tax-free as well.  A well-constructed Roth conversion strategy aims to keep your lifetime taxes as low as possible.   

But retirement accounts can also be used to support charitable causes.  Beginning at age 70 ½, anyone with a traditional IRA can donate up to $100,000 per year to a qualified charity.  This is known as a qualified charitable distribution (QCD).  A married couple can contribute $100,000 per year, per person.  The benefit of doing this is that any QCD is made tax-free.  That is, no taxes are paid on money that went directly from an IRA to a charity.   

Given this understanding, it’s easy to understand that a conflict might arise when someone wants to do Roth conversions AND qualified charitable distributions.  Here are 6 things you should consider when trying to decide what is right for you. 

1.  How ambitious are your charitable contribution goals? 

Some people plan to give away the vast majority of their wealth to charity.  Other people have a certain dollar amount in mind—no more, no less.  Some people want the most ‘bang for their buck,’ meaning they want their charitable contributions to be as tax-efficient as possible—or they want to lower their tax bill as much as possible and will contribute what makes sense from a tax perspective. 

The question that you should always consider is—Is the dollar amount worth the amount of time I’m putting into this?  That’s a very subjective question, but one worth thinking about.   

2.  What does your charitable distribution plan look like?   

What does this question mean?  Some people want to enjoy their hard-earned wealth while they can, but leave whatever remains for a charity.  Others might want to contribute while they are alive to witness the benefits of their charitable donation.  Some people might set up a donor-advised fund (which you can’t contribute QCDs to, unfortunately), then decide where their money goes each year.  Others may sit down with their local charity, such as a church or small non-profit, and work with them to help support that organization’s needs.   

Knowing what you’d like your charitable dollars to accomplish, and having an idea of when those dollars will be put to work—that’s the beginning of a distribution plan.  If you had to start a plan today, what would it look like? 

3.  What does your Roth conversion strategy look like? 

If you don’t have a Roth conversion strategy, that’s okay.  If you’re a recent retiree, Roth conversions might not have been at the top of your priority list.  And if you’ve been doing Roth conversions for a while, you might be well on your way to having all of your money in an account where you never have to worry about income taxes again. 

However, it is fair to look at both the Roth conversions and the charitable distributions to see how much you actually need to convert into a Roth account.  It might be worth leaving some money in the traditional IRA for when you do QCDs.  To be more direct, instead of trying to figure out the lowest tax bracket, try to estimate how much you’d like to give away to charity, tax-free?  After all, why pay taxes at all, if you don’t have to? 

But, you do have to consider one thing. 

4.  QCDs cannot start until age 70 ½.  

However, there are other tax-advantaged ways you can support charities. 

This goes back to the question about how your charitable plan should look.  Are you okay with waiting until age 70 ½, so that you can maximize the tax efficiency of your contribution (i.e. getting the most bang for your buck)?  Or do you want to see your money doing good things before you turn 70 ½? 

If your answer is the latter, then you might consider exploring a couple of other options: 

Donating appreciated, low-basis securities (like stock or mutual funds)  

This is especially good for people who have held shares of stock (usually family gifts) for a long time, but don’t know what to do with them.  Low-basis simply means that you might have paid much less (or whomever gave the stock to you paid much less) than what it’s worth today.  When you sell the stock at today’s price, you would normally incur a capital gain.  While capital gains are taxed at lower rates than ordinary income, there are still taxes involved.  Simply donating the stock to the charity means that you can deduct the full value of the stock without having to pay any taxes.  It is much better than selling the stock, paying the taxes, and donating the balance to the charity.  Note:  if you have stocks that have a capital loss, you’re probably better off selling the stock, then donating the cash—your capital loss can be used to offset taxable income elsewhere. 

Donor-advised funds  

Donor-advised funds (DAFs) are a great option for someone who wants to donate appreciated securities, but doesn’t want everything to go to one place.  You might not even have a charity in mind yet, but you’d like to set aside some money for when the right cause comes along.  When you set up a DAF, you can donate over the course of several years, simply to build your account up to a level that can support your grant recommendations (for more detail, you would need to consult with the DAF administrator).   

 While you can contribute to a DAF from your retirement plan, there’s really no tax-efficiency in doing so while you’re alive.  You would have to withdraw the desired amount, pay taxes, then contribute cash to the DAF.  However, designating a DAF as a beneficiary for your IRA or 401(k) can be a great estate planning tool, for those who have estate tax planning considerations.  

Bunching deductions on Schedule A

Because of the Tax Cuts and Jobs Act’s (TCJA) increase in the standard deduction, fewer households are itemizing their deductions on Schedule A of their tax return.  For those households who still might itemize, it might be worthwhile to ‘bunch’ your charitable contributions into a year where you’re already planning to itemize, then take advantage of the standard deduction the following year.   

While your QCDs don’t become an option until age 70 ½, that doesn’t mean that it’s time to stop your Roth conversions. 

5.  Roth conversions don’t have to end just because you start taking RMDs or start making QCDs 

Thanks to the Setting Every Community Up For Retirement Enhancement (SECURE) Act, required minimum distributions (RMDs) have been pushed out for traditional retirement accounts to age 72 (instead of age 70 ½).  But if you weren’t able to convert all of your accounts into Roth IRAs before then, that doesn’t mean you can’t keep going. 

The only thing that’s different after you reach age 72 is that you have to take your RMD before any Roth conversions are considered.  So, when executing your Roth conversion strategy, you might want to take that under advisement as you try to determine what tax bracket you’re trying to stay in.   

The best news is for the people who had planned to contribute their RMD as their QCD.  In other words, choosing for 100% of that year’s RMD to be contributed directly to charity.  That person’s tax bill will be the same as if they didn’t have an RMD at all.   

And in that case, you’re simply executing the Roth conversion strategy as if you weren’t taking RMDs.  And the added benefit is that you’re working your traditional account balance down so that your future RMDs will be lower than they would have been. 

6.  Don’t let the tail wag the dog.  

What’s important to you should always remain that way. 

Whatever you decide, you need to make the best decisions for your personal situation.  The more ‘priorities’ you establish, the more like it is that two (or more) of them will conflict with each other.  For example, even if it’s not the most tax-efficient approach, you may decide to make additional Roth conversions because you don’t want your account beneficiaries to pay taxes on the retirement accounts they might eventually inherit.    

Or you might decide that you’re going to write a bunch of smaller checks to a variety of charities before you reach age 70 ½, because you want to support a wide range of good causes.  Or you might decide to simply convert everything to a Roth account, enjoy your tax-free withdrawals while you’re alive, then leave anything that’s left behind to a charity.   

Sometimes, you can’t have your cake and eat it, too.  While it’s worth exploring, it’s not worth burdening yourself with a lot of stress over.  Pick the one thing, and make it your priority. 


If you’re interested in learning more about how to balance your Roth conversion and your charitable goals, you should talk with your financial advisor or tax professional. 

Interested in reading more about Roth conversions?  Check out Lawrence Financial Planning’s Roth conversions articles page.  Here you’ll find lots of articles that we’ve written about Roth conversions.  And if you’re ready to hire someone to help you create, implement, and maintain your Roth conversion strategy, contact us.  At Lawrence Financial Planning, we would be more than happy to schedule a complimentary phone call to see how we can be of service to you.

The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.  Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.   Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.

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