ReTIRemenT
a lower tax bracket and , with an inherited Roth , require less income from traditional IRA or 401 ( k ) withdrawals .
Very wealthy investors will often benefit from well-planned conversions , even when taxed at relatively high brackets . And investors with company founders ’ shares priced below their market value can avoid taxes entirely by transferring technically worthless stock into a Roth account .
When should an investor not do a Roth conversion ?
Most investors shouldn ’ t while they are still working . They should wait until they are in a lower tax bracket before withdrawing money from IRAs , 401 ( k ) s and similar accounts .
Investors should also avoid making too-large conversions in a single calendar year but stagger conversions over several years .
No one should do a Roth conversion out of fear of future tax rate increases . Those are simply unpredictable .
Who should stay the course and keep their tax-qualified savings in those accounts ? Investors with modest IRAs and brokerage accounts will benefit little from
Roth conversions . New retirees in good health are also probably better off using some of their tax-advantaged savings to finance living expenses and delay Social Security ( to age 70 , if possible ) to get the maximum benefit from the government .
What techniques can make Roth conversions more valuable ?
Asset location is the practice of choosing what investments to place in what accounts based on the tax treatment of the accounts . Applying this to Roth conversions means that investors should locate their high-returning assets in those accounts .
Another technique applies again to couples with a significant age gap . When an older spouse makes voluntary IRA withdrawals to fund Roth conversions it can help minimize RMDs and provide for the younger spouse when widowed .
Are Roth conversions a good tool for estate planning ?
Yes , they are an excellent tool . Heirs who inherit Roth IRAs aren ’ t taxed on withdrawals . They are taxed on withdrawals from traditional IRAs ( which sets up a complicated situation for their financial advisors , tax accountants and heirs to figure out ).
Remember this : Conversions need to occur over many years and they depend on the tax brackets of the investors in those years . Figuring these out requires software that combines an accurate tax calculator with multi-period projections to inform the investors ’ choices .
Investors should avoid making too-large conversions in a single calendar year .
Most of the Roth conversion calculators that investors find online aren ’ t up to the task . They look only at a Roth conversion in a single calendar year and assume it ’ s possible to estimate future tax rates on withdrawals from qualified accounts . They ’ re as good as a broken analog clock is in providing the time : It ’ s accurate for one minute , twice a day .
Advisors who stay close to their clients and are agile — revising recommendations with market returns and clients ’ situations — will benefit by retaining more assets under management and possibly earning the business of younger family members and associates .
Paul R . SamuelSon is the chief investment officer and co-founder of lifeYield .
Charitable Giving continued from page 30
previous fiscal year . A total of $ 4.7 billion was given to the fund in fiscal 2022 , an increase of 27 % over fiscal 2021 .
What ’ s more , Schwab Charitable donors increased the proportion of grants not designated for a specific purpose . The unrestricted grants reached 72 % of the total , “ affording even more nonprofits greater flexibility to put donations toward immediate needs ,” said Schwab ’ s report .
Donor-advised funds are now the fastest-growing philanthropic vehicle in the U . S ., exceeding one million individual accounts in 2020 , according to the
National Philanthropic Trust ’ s report on the funds . Total giving to donoradvised funds reached $ 47.85 billion , an all-time high , in 2020 , the latest figures available . Grants from the funds to qualified charities totaled an estimated $ 34.67 billion , another new high . At the same time , the average size of an individual donor-advised fund account is estimated to be $ 159,019 .
The increases in giving are bolstered by the growing interest in donating noncash assets , Heisman concludes . “ More than ever , donors are looking beyond their checking accounts for ways to support their favorite organizations and causes ,” she says . “ Complex assets have become a growing funding source for donor-recommended donor-advised fund grant-making . National Philanthropic Trust donors have supported more than a hundred thousand charities in the last five years , in part due to complex asset contributions .”
And that ’ s important for advisors as they embrace philanthropy advice using donor-advised funds as a vehicle . Kaynor says that in Schwab Advisor Services ’ “ RIA Benchmarking Study ,” advisors listed charitable giving planning as the number one value-add service they provide .
And donor-advised funds have “ become an integral part of their overall planning tools ,” he says .
56 | financial advisor magazine | september 2022 www . fa-mag . com