$340K Tax Savings with Charitable IRA Rollover Strategy

$340K Tax Savings with Charitable IRA Rollover Strategy

Executive Summary

Many retirees face a dilemma: they possess significant IRA assets subject to required minimum distributions (RMDs), which increase their taxable income, while also desiring to support charitable causes. Legacy Bridge Advisors successfully addressed this challenge for a client by implementing a qualified charitable distribution (QCD) strategy. By strategically directing RMDs directly to qualified charities, the client avoided a projected $340,000 in income taxes over ten years, effectively doubling their charitable giving capacity without increasing their out-of-pocket expenses.

The Challenge

Our client, Mrs. Eleanor Vance, recently retired after a successful career in education. Her prudent savings habits resulted in a substantial IRA balance of $1.8 million. While this provided a comfortable retirement nest egg, it also presented a significant tax challenge. At age 73, Mrs. Vance was required to begin taking RMDs.

Based on her IRA balance, her initial RMD was approximately $72,000. This pushed her into a higher tax bracket, increasing her federal income tax liability by approximately $20,000 annually. In addition to federal taxes, she also faced state income taxes, further eroding her retirement income.

Beyond the tax implications, Mrs. Vance was deeply committed to supporting two local charities: a children's literacy program and an animal rescue organization. Previously, she had donated approximately $10,000 annually to these organizations. However, post-retirement, she was concerned about the impact of these donations on her reduced income and the increased tax burden from her RMDs. She felt conflicted, wanting to maintain her charitable contributions but unsure how to do so without significantly impacting her financial well-being. The standard deduction, while helpful, was not enough to fully offset her charitable contributions, leaving her still paying taxes on a significant portion of her RMD.

The core problem was balancing Mrs. Vance's desire to give generously with the realities of her taxable RMDs and overall retirement income. The traditional approach of taking the RMD, paying taxes on it, and then donating to charity was simply not tax-efficient. She was essentially paying taxes on money that was ultimately intended for charitable purposes.

The Approach

Patricia Brennan at Legacy Bridge Advisors recognized the potential of a qualified charitable distribution (QCD) strategy to address Mrs. Vance's specific needs and goals. A QCD allows individuals age 70 ½ or older to directly transfer up to $100,000 per year from their IRA to a qualified charity, without the distribution being included in their taxable income.

The strategic framework involved several key steps:

1. Needs Assessment & Goal Setting: Patricia began by thoroughly understanding Mrs. Vance's financial situation, charitable goals, and risk tolerance. This included analyzing her current income, expenses, asset allocation, and philanthropic priorities. They discussed the importance of maintaining a comfortable lifestyle while maximizing her charitable impact.

2. QCD Suitability Analysis: Patricia meticulously evaluated whether a QCD strategy was appropriate for Mrs. Vance, considering her age, IRA balance, charitable intentions, and tax bracket. She calculated the potential tax savings based on Mrs. Vance's projected RMDs and her desired level of charitable giving.

3. Charity Qualification Verification: Legacy Bridge Advisors ensured that the children's literacy program and the animal rescue organization were qualified 501(c)(3) charities, eligible to receive QCDs. They confirmed their tax-exempt status with the IRS.

4. Collaboration with Custodians: Patricia proactively contacted custodians at Fidelity and Schwab, where Mrs. Vance held her IRA accounts, to understand their specific QCD procedures and requirements. This included obtaining the necessary forms and establishing a streamlined process for executing QCD transfers.

5. Tax Planning & Documentation: Patricia developed a comprehensive tax plan illustrating the benefits of the QCD strategy, projecting the anticipated tax savings over a ten-year period. She also meticulously documented each QCD transaction, ensuring compliance with IRS regulations.

6. Ongoing Monitoring & Review: Legacy Bridge Advisors committed to annually reviewing Mrs. Vance's financial situation and charitable goals to ensure that the QCD strategy remained optimal. They would also adjust the strategy as needed based on changes in tax laws, her RMD requirements, or her philanthropic priorities.

The underlying strategic thinking was to leverage the tax benefits of QCDs to essentially "double" Mrs. Vance's charitable giving capacity. By directing her RMDs directly to charity, she could avoid paying income taxes on those distributions, freeing up more of her retirement income for personal use or additional charitable contributions.

Technical Implementation

Implementing the QCD strategy involved specific technical details and coordination with various financial institutions:

1. Custodian Coordination: Legacy Bridge Advisors worked directly with Fidelity and Schwab to establish a dedicated QCD process. This included completing the necessary transfer forms, providing instructions for direct transfers to the charities, and tracking the QCDs for tax reporting purposes. They established a system for ensuring that the QCDs were properly documented and reported to the IRS.

2. RMD Calculation & Allocation: Patricia used sophisticated financial planning software to accurately calculate Mrs. Vance's RMD each year. She then strategically allocated the QCDs to satisfy the RMD requirements, ensuring that Mrs. Vance met her legal obligations while maximizing her tax benefits. They prioritized using the QCD for a portion of her RMD, up to the $100,000 limit, before considering other withdrawal strategies.

3. eMoney Advisor Integration: Legacy Bridge Advisors utilized eMoney Advisor, their financial planning software, to model the impact of the QCD strategy on Mrs. Vance's overall financial plan. This included projecting her income taxes, retirement income, and net worth under various scenarios. eMoney Advisor was also used to generate annual tax planning summaries, clearly illustrating the tax savings achieved through the QCD strategy. These summaries provided Mrs. Vance with a transparent and easy-to-understand view of her financial situation.

4. Tax Form Management: The team meticulously tracked all QCD transactions and provided Mrs. Vance with the necessary documentation for filing her taxes. This included ensuring that the charities provided acknowledgement letters for each donation, as required by the IRS. They also prepared Form 1099-R with the appropriate coding for the QCDs.

5. Investment Strategy Alignment: Legacy Bridge ensured Mrs. Vance's investment portfolio remained aligned with her overall risk tolerance and financial goals. Although the QCD strategy focused on the RMD and charitable giving, it was crucial the remainder of her portfolio continued to perform according to plan. This included periodic reviews and adjustments as needed.

The technical aspects of implementing the QCD strategy required a deep understanding of IRA rules, tax regulations, and custodian procedures. Legacy Bridge Advisors' expertise in these areas was crucial to the success of the strategy.

Results & ROI

The QCD strategy implemented by Legacy Bridge Advisors yielded significant financial benefits for Mrs. Vance:

• $340,000 in Projected Tax Savings: Over a ten-year period, the QCD strategy is projected to save Mrs. Vance approximately $340,000 in income taxes. This assumes an average annual income tax rate of 28% on the $100,000 QCD each year. This figure is a conservative estimate, as it does not account for potential increases in tax rates in the future.

• Doubled Charitable Giving Capacity: By avoiding taxes on the QCDs, Mrs. Vance effectively doubled her charitable giving capacity. She was able to donate $100,000 annually to her favorite charities without increasing her out-of-pocket expenses.

• Reduced Taxable Income: The QCD strategy significantly reduced Mrs. Vance's taxable income, potentially lowering her Medicare premiums and other income-based expenses. This contributed to an overall improvement in her financial well-being.

• Simplified Tax Filing: The QCD strategy simplified Mrs. Vance's tax filing process. By directly transferring funds to charity, she avoided the need to itemize deductions and track charitable contributions.

• Enhanced Peace of Mind: Mrs. Vance experienced increased peace of mind knowing that she was maximizing her charitable impact while minimizing her tax burden. She felt confident that her financial affairs were being managed in a tax-efficient and responsible manner.

In essence, the QCD strategy transformed Mrs. Vance's RMD from a potential tax liability into a powerful tool for charitable giving. The strategy not only saved her money but also allowed her to make a greater positive impact on her community.

Key Takeaways

For other RIAs and wealth managers considering similar strategies for their clients:

1. Understand the QCD Rules: Thoroughly understand the eligibility requirements, contribution limits, and documentation requirements for QCDs. Ensure your clients meet the age requirement (70 ½ or older) and that the charities they support are qualified 501(c)(3) organizations.

2. Proactively Engage with Custodians: Establish strong relationships with custodians to streamline the QCD transfer process. Understand their specific procedures and requirements and develop a system for efficiently executing QCDs on behalf of your clients.

3. Integrate QCDs into Financial Planning: Incorporate QCDs into your clients' overall financial plans, modeling the potential tax savings and charitable benefits. Use financial planning software to illustrate the impact of QCDs on their income taxes, retirement income, and net worth.

4. Communicate Clearly with Clients: Explain the benefits of QCDs in a clear and concise manner, using simple language and avoiding technical jargon. Help your clients understand how QCDs can help them achieve their charitable goals while minimizing their tax burden.

5. Document Everything Meticulously: Maintain detailed records of all QCD transactions, including transfer forms, charitable acknowledgements, and tax planning summaries. Ensure compliance with IRS regulations and provide your clients with the necessary documentation for filing their taxes.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors identify tax optimization opportunities for their clients, like the charitable IRA rollover strategy, and deliver personalized financial plans at scale. Visit our tax-optimization tools to see how we can help your practice.