Tax-Free Planning for the Charitably Minded

Recent changes in tax laws have resulted in important provisions for the annual required minimum distributions (RMD) and qualified charitable deductible limits (QCD). In conjunction with those adjustments, market volatility has sweetened the pot when considering Roth conversions. All three of these changes have created unique and unprecedented opportunities for charitably minded investors.

Back in 2019, Congress raised the age that IRA owners are required to start taking distributions from their IRAs from age 70½, to age 72. Surprisingly, the required age for making qualified charitable distributions remains at 70½. A QCD allows for a direct contribution, up to $100,000 per year, from an IRA to a qualified charity (not a donor-advised fund) without realizing taxes.

Mandatory IRA distributions were impacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Upon its signing in March of 2020, the IRS totally suspended RMDs for 2020. This means there is no hindrance to clients who may consider a Roth conversion, as usually RMDs must be satisfied prior to taking any Roth conversions.

Another important aspect of the CARES Act allows deducting cash charitable deductions up to 100% of Adjusted Gross Income (AGI). This is a significant increase from the 60% maximum deduction of a cash contribution offered in 2019.

These three important changes can present an opportunity for charitably motivated clients to move funds out of their pre-tax retirement accounts and make a meaningful contribution to their favored charities, completely tax-free.

The strategy includes converting a traditional, pre-tax IRA to a Roth IRA. A Roth conversion triggers a tax on the amount of the IRA that is transferred. Then, consequently making a charitable gift of cash for the same amount.

Here’s an example of this opportunity, illustrated with a retired, married couple filing jointly with $100,000 of AIG:

• Converting $50,000 from a Traditional IRA to a Roth IRA, realizing taxes but forgoing tax withholding.

• Making a cash contribution of $50,000 to a qualified charity with other funds.

• The charitable gift would completely offset any tax that was realized by the Roth conversion. Also, the converted funds would continue to grow tax-free in the Roth IRA.

This method is distinct from QCDs; QCDs are geared towards taxpayers who take the standard deduction, whereas this Roth conversion/cash gift combination relies on taxpayers itemizing their deductions. QCDs are still an available option for donors in 2020. This example is for illustrative purposes and we encourage you to consult with your tax professional.

Olson Wealth Group has been closely monitoring new legislation, as helping you pursue your financial goals requires an understanding of changing laws and regulations.

Olson Wealth Group is a full service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth.

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