I read one of your recent columns where you talked about converting money into a Roth IRA, and using your minimum required distributions for charitable contributions. I have a couple of questions I hope you can help me with. My first question deals with my conversion. Am I allowed to convert my minimum required distribution for this year? I am in my early 70s, and have not taken my minimum required distribution for this year; am I still required to take it? My second question deals with charitable contributions. If I am required to take a minimum required distribution this year, is that eligible to be donated to a charity even though I’m doing the Roth conversion? Also, when you donate your minimum required distribution to charity, are you limited to one charity or can you use multiple ones?
First, I think it is great that you’ve done a Roth conversion. I believe more and more people ought to take advantage of it, as it allows you to turn tax-deferred money into tax-free money. That being said, unfortunately, you’re not allowed to convert your minimum required distribution. Your minimum required distribution is determined by the balance of your account as of December 31st of the previous year. Therefore, if based upon that number you have to withdraw $10,000 this year out of your IRA, that $10,000 is not allowed to be converted into a Roth. You can convert anything above your minimum required distribution, but minimum required distributions are not allowed to be converted.
In that regard, there’s still time before the end of the year for people to take advantage of Roth conversions. Remember, anyone is eligible for a Roth conversion. The key is whether it fits your individual situation.
With regard to donating your minimum required distribution, you can donate that money to as many charities as you choose. In addition, some people think they have to donate their entire minimum required distribution; that is not the case. You can donate any portion of it that you choose.
With regard to both Roth conversions and charitable contributions from your IRA, the key is, these transactions must be completed by the end of the year. Therefore, for those of you who are thinking of performing these transactions, the time is now.
Unfortunately, too many seniors do not take advantage of the opportunity to donate their minimum required distribution to a charity. It is not that these seniors are not making charitable contributions; however, they’re not doing it in the most tax efficient manner. Of course you don’t give to a charity because you want the tax write-offs; rather, you give to a charity because you want to help that charity accomplish its goals. However, if you can make it tax efficient for yourself, why not? Particularly under our new tax law where many seniors find they are no longer itemizing their charitable contributions. When you use your minimum required distribution and donate that to a charity, you are not paying tax on the distribution which you normally would have. That is where the tax savings are coming from.
I certainly am not telling people that they should donate their minimum required distributions to a charity. However, for people who are charitable in nature, and who make charitable contributions, and who are no longer itemizing their deductions, it is a strategy to consider. Not only will this save you on income taxes, but it could also have a positive impact on determining whether your Social Security Benefits are subject to tax, and how much you will pay in Medicare premiums.
When it comes to our tax laws, it is important to dot the I’s and cross the T’s. Therefore, if you decide to donate your minimum required distribution to a charity, you must make sure you follow the rules. Basically, you have to have the money directly transferred from your IRA into the charity. If the money is directly distributed to you and then you transfer it to the charity, unfortunately, you won’t get the tax breaks.
One last note, whether it is doing a Roth IRA conversion or using your minimum required distribution for a charitable contribution, it does require your IRA custodian to be involved. IRA custodians get extremely busy before the end of the year and therefore, to make sure that you don’t miss out on the opportunity, don’t delay in getting the process going.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.