Charitable giving and Roth conversions are powerful tools for managing wealth and achieving long-term financial goals. By strategically combining these two approaches, high-net-worth individuals (HNWIs) can optimize their tax strategy, align their wealth with personal values and preserve wealth for future generations. In this article, Laura Stenzel, CPA, CFP®, MBT, Wealth Manager, and Rachel Rice, CFP®, Wealth Manager, detail opportunities for charitable giving and the potential of Roth conversions.
Charitable giving as a wealth management tool
Charitable giving offers more than the satisfaction of supporting meaningful causes; it can also be a key part of your overall wealth management strategy. Donating appreciated assets, such as stocks or real estate, allows you to avoid paying capital gains taxes on those assets while, at the same time, the donation reduces your taxable income. This approach balances your portfolio, lowers exposure to capital gains and provides significant tax savings. For HNWIs, charitable giving can also mitigate concentration risk in your portfolio. If a large portion of your wealth is tied up in a single asset, donating some or all of that asset diversifies your holdings, ultimately supporting your financial goals and philanthropic efforts.
Roth conversions for long-term tax efficiency
Roth conversions involve transferring funds from a traditional IRA or 401(k) to a Roth IRA. While conversions are taxable in the year they occur, the long-term benefits can be significant. Roth IRAs grow tax-free, and withdrawals in retirement are not subject to taxes, providing greater control over retirement cash flow. Roth IRAs also do not have Required Minimum Distributions (RMDs), which help manage retirement cash flow and reduce future tax liability. For those who expect to be in a higher tax bracket during retirement, Roth conversions allow you to pay taxes at a lower rate now and enjoy tax-free income in the future. Additionally, they can reduce your taxable estate’s size, preserving future generations’ wealth.
Combining charitable giving and roth conversions
The true power of charitable giving and Roth conversions lies in how they can work together to reduce tax liability. When you make charitable donations, especially in the same year as a Roth conversion, you can reduce your total taxable income, lowering the taxes owed on the conversion. For example, converting $100,000 from a traditional IRA to a Roth IRA adds that amount to your taxable income. However, donating $50,000 in appreciated assets to charity reduces your taxable income and effectively lowers the taxes owed on the conversion.
By timing charitable contributions to occur in years of high income, you can reduce taxes today while preserving more assets for future growth. Consulting with a wealth management advisor can help you determine the most appropriate gifting strategies to complement your unique financial goals.
Philanthropy and legacy building
Charitable giving plays a significant role in legacy planning. Donating during your lifetime reduces the size of your taxable estate and can lower estate taxes for your heirs. Charitable giving is not only about reducing taxes; it’s about creating your legacy by making a deliberate choice to support the causes that matter most to you. This often provides a sense of fulfillment and purpose, knowing your wealth can benefit others meaningfully.
Roth IRAs similarly complement this strategy, allowing for tax-free growth and inheritance. By converting traditional retirement accounts to Roth IRAs, you can build a tax-free source of income for the future while minimizing taxes on your RMDs. Also, your heirs can inherit Roth IRAs without owing taxes on withdrawals, providing a tax-efficient way to pass wealth to the next generation.
Helping You Get There…
The combination of charitable giving and Roth conversions is a powerful strategy for wealth transfer, aligning your personal values with your financial goals. Whether you are focused on preserving wealth for retirement, leaving a legacy for your heirs, or both, these strategies provide a tax-efficient and impactful approach to wealth management. As you explore your options, consider consulting with a wealth management advisor to ensure these strategies align with your broader financial and estate planning goals. We’re here to help you build a lasting legacy.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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