Qualified Charitable Distributions
Roth conversions , however , aren ’ t the only way to reduce the funds in traditional IRAs . Clients with philanthropic goals who are 70½ or older can take money out of these accounts by making qualified charitable distributions ( QCDs ) of up to $ 105,000 per year ( an amount that will increase to $ 108,000 in 2025 ). The money can go directly from their traditional IRA to any 501 ( c )( 3 ) charity .
This strategy can be more attractive than Roth conversions , says Azim Nakhooda , a senior partner at Signature Estate & Investment Advisors in Cleveland .
That ’ s because the charitable distributions are tax-free and count against the current year ’ s required minimum distributions ( unless the RMD has already been taken ). Since the qualified charitable distribution can ’ t be made from 401 ( k ) s , clients who want to go this route will first have to roll their 401 ( k ) s over into IRAs .
Nakhooda adds that a person ’ s Roth conversion decision can be affected by the state they live in — and whether they plan to move to another state after they stop working . Some states tax Roth conversions ; others don ’ t . “ Depending on the scale of the assets , the elimination of state tax on these conversion calculations can have a tangible impact on the overall math ,” he says .
He also points out that it can be useful for clients to keep some funds in traditional IRAs instead of Roths since they can use these IRA monies to help pay for their medical and long-term-care expenses in later years , something that can come in handy if the clients don ’ t have LTC insurance . These expenses are deductible
It ’ s important to check the math , since a Roth conversion now could push your client into a higher tax bracket this year . es triggered . Those wanting to avoid this fate could benefit from a Roth conversion , Bradley says , since Roths are exempt from required minimum distributions .
But that ’ s why it ’ s important to check the math , since a Roth conversion now could push your client into a higher tax bracket this year .
Additional Factors
An additional thing to consider , Bradley says , is the potential long-term effect of Roth conversions on your client ’ s heirs . “ If a client ’ s beneficiaries have lower incomes [ than the client has ], it might not be best to convert funds to a Roth IRA ,” he says , since the conversion would be at a higher tax bracket than what the beneficiaries would have to pay when they inherit . “ In contrast , if a client ’ s beneficiaries are in higher tax brackets than [ the client ], a conversion might make sense to avoid those beneficiaries paying at higher tax brackets when they inherit .”
In addition , inherited IRAs must be completely emptied by the 10th year after the original owner ’ s death . That can throw a considerable tax burden on the inheritor — unless the inherited account is a Roth . The payouts from those are always tax-free .
Someone else the client should keep in mind is their surviving spouse , who sometimes ends up in a higher tax bracket the year after the account holder dies because the widow or widower is no longer filing jointly but as a single person . The two spouses should always review the effect of converting funds to a Roth IRA before that scenario plays out , McKeown says . on Schedule A of the federal tax return , so tapping traditional IRAs to cover them reduces the taxes on those withdrawals , he says . Since Roth payouts are tax-free anyway , there ’ s less benefit in using Roth money for those costs .
“ A retiree with high medical costs … could reduce the impact of traditional IRA withdrawal taxes ,” says Nakhooda , adding that Roth conversions may not be as beneficial to such investors .
But keep in mind : It ’ s not all-or-nothing with IRAs . Clients can keep a traditional account and convert just some of the money to Roths if that makes more sense . For instance , if a higher Roth conversion could wind up pushing the client into a 32 % tax bracket , it may be better to convert less — just enough to fill out the 24 % bracket , after which they could convert more in the future .
Nakhooda says you and your clients should weigh “ multiple factors ” before undertaking any Roth conversion :
“ Very rarely is there a universal ‘ good idea ’ in financial strategy .”
JANUARY / FEBRUARY 2025 | FINANCIAL ADVISOR MAGAZINE | 49