Supercharging Roth Conversions with Charitable Giving

This past weekend, me and a couple of buddies spent 2 days backpacking roughly 22 miles around Mount Rogers in southwest Virginia. We followed sections of the Appalachian Trail through blooming rhododendron tunnels, crossed open highland meadows filled with wild ponies, and managed to whip our legs into shape during the process. We typically plan these trips well in advance, so it’s really nice when you pull the rarest backpacking card of them all: perfect weather and temps in the 40’s-70’s. There’s nothing quite like hanging on to your sleeping bag for a few extra minutes in the morning, sipping instant coffee to stay warm, and ending the day with a sweat after climbing that last hill. There’s a few of you that know exactly how amazing this feels.

The same people that understand this feeling, also know struggle we have with weight. Not our body weight, but the weight of everything you are hauling on your back.

When I first started backpacking years ago, there was nothing in my house I didn’t need. Every pot and pan, flashlight, battery pack, comforter, and microwave was thrown in the pack just in case, I don’t know, the apocalypse happened. Our first trip was the Zion Traverse (because, you know, go big or go home), and it only took ten hours of uphill hiking to gain a whole new perspective of the outdoors.

After enough trips, you start weighing literally everything. You discover there are entire corners of the internet dedicated to debating whether a titanium spoon is worth saving half an ounce. Rational people become completely unhinged over the weight issue…and that’s how I got my pack from 45lbs to 25lbs over the years.

What I’ve learned is that backpacking isn’t about adding comfortable, luxurious items to my pack. It’s about figuring out what you can remove without sacrificing the experience. Nobody reaches mile 15 wishing they had packed more stuff. The biggest gains usually come from eliminating the things that were weighing me down in the first place.

Financial planning tends to work the same way. When we’re building wealth, most of our focus is on accumulation. We spend decades adding. More savings, more investments, and more retirement accounts. And at some point, we’ve added so much that we’re not quite sure what’s in our “pack.”

As retirement approaches, some of the most valuable planning opportunities aren’t about finding another investment or chasing a higher return. They’re about identifying unnecessary drag and removing it. One of those big pesky things in our retirement picture is taxes.

We talk about taxes relentlessly in our practice, but one of my favorite examples of reducing the drag is pairing charitable giving with Roth conversions. In some cases, donating appreciated assets may help avoid realizing capital gains on the donated securities while supporting charitable goals. For some charitably inclined retirees, this may be worth evaluating with their financial and tax professionals.

Let’s start with the years before Required Minimum Distributions enter the picture.

Many of the families we work with are in a unique position during their 60s and early 70s. Their income has often declined after retirement, but their IRA balances are still substantial. In other words, they’re standing in a relatively favorable tax environment before the IRS eventually forces larger distributions later in life. This depends on income, deductions, tax brackets, Medicare considerations, and broader financial circumstances.

Those years may create an opportunity to evaluate Roth conversions.

The challenge, of course, is that every dollar converted is generally taxable. Convert $100,000, and you’ve potentially added $100,000 of income to your tax return. That’s not necessarily a bad thing if we’re converting at attractive tax rates, but nobody enjoys writing a larger check to the IRS than necessary.

This is where charitable planning can become incredibly powerful.

Suppose you’ve accumulated a highly appreciated stock position over the years. Maybe it’s a company you worked for, a fund you’ve owned forever, or simply an investment that has done exceptionally well. Selling those shares would likely create a sizable capital gain. In some cases, you may be able to transfer appreciated shares directly into a Donor-Advised Fund, though tax benefits depend on your AGI limits, whether you itemize, asset valuation, and guidance from your tax advisor.

The charity receives the full value of the shares. You potentially receive a charitable deduction. And perhaps most importantly, the donor may avoid realizing capital gains on the donated appreciation, assuming applicable rules are met.

In the right circumstances, this approach may help address several objectives at once: reducing a concentrated position, advancing charitable intent, and potentially creating a deduction that may be considered alongside Roth conversion income.

I often tell clients that good planning is rarely about finding one magical strategy. It’s about getting several pieces of the puzzle to work together. A Donor-Advised Fund paired with Roth conversions is one of those situations where the whole can become greater than the sum of its parts.

Then the strategy evolves once Required Minimum Distributions begin.

By the time many retirees reach their mid-70s, the conversation often changes. The IRA has continued growing for decades. Required distributions start arriving whether you need the income or not. Taxable IRA distributions generally show up on your tax return, potentially increasing Medicare premiums, affecting taxation of Social Security benefits, and creating additional tax drag throughout retirement.

For charitable families, this is where Qualified Charitable Distributions become one of the most elegant planning tools available.

Rather than receiving your Required Minimum Distribution, paying tax on it, and then writing a check to charity, the IRS allows eligible individuals to send money directly from their IRA to qualified charities. The distribution satisfies part or all of the Required Minimum Distribution requirement, but a properly executed QCD is generally excluded from adjusted gross income.