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Tax-Smart Charitable Planning (Archived)

Tax-Smart Charitable Planning (Archived)

February 09, 2016

Giving your Roth or RMD

Charitable planning and philanthropy can play a key role in reducing the tax burden of individuals who convert an IRA into a Roth IRA or for those taking required minimum distributions (RMD).

Roth conversions may make sense if you face higher taxes when you begin withdrawing funds. In addition, a Roth conversion can increase the amount available to heirs. Since there are no minimum distribution requirements during the owner’s lifetime, more money can remain in a Roth account to grow, tax free, for a bequest.

Heirs to Roth IRAs are required to make distributions. However, the earnings are exempt from federal income tax as long as the account was opened five years before the first withdrawal. These distributions can continue for an heir’s lifetime and the balance of funds can continue to earn returns tax free.

A charitable gift of IRA assets, especially RMD distributions, can also be a great way to help offset taxes and support philanthropic causes at the same time. For those who are planning to make charitable donations in the future, they might consider accelerating their giving in the years of the Roth conversion and RMDs.

Add a Donor Advised Fund

So how does a Roth-holding or RMD individual get a benefit?

One way to get an instant tax deduction for charitable giving is through a donor-advised fund (DAF). Contributions to donor-advised accounts are irrevocable and must go to charity. While the tax benefit is immediate, the charitable grants can be distributed over time. This allows you to make decisions about grants to desired charities as they see fit. The DAF sponsor handles all the administrative details, leaving the client to focus on the more enjoyable aspects of philanthropy.

In another noteworthy benefit, those who give gifts of appreciated securities held for more than one year avoid capital gains taxes when they’re sold. This means that donors may be able to gift up to 20% more of their holdings to charity.

Charitable planning and philanthropy can be key components of larger financial planning efforts. DAFs in particular can provide a simple, tax-smart way to help with retirement savings or reduce income taxes or minimize estate taxes for heirs; all while letting you build a legacy that outlives them.