Leaving all to Charity so what % should be in Roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
packercd
Posts: 5
Joined: Sun Mar 13, 2016 2:23 pm

Leaving all to Charity so what % should be in Roth

Post by packercd »

My wife and I have a little over $1 million in low cost Fidelity index funds in our IRA's with around 10% in Roth. Not really much in taxable accounts. We have no children and plan on leaving it all to charity. I thought I might start converting some to Roth but when we die the charities will not have to pay tax so I figure that moving it might not be wise.

We really don't have a lot of need for the money with a paid for home and pensions along with Social Security. Right now it's kind of our insurance against long term care. Anyone in a similar situation? Thanks.
increment
Posts: 646
Joined: Tue May 15, 2018 2:20 pm

Re: Leaving all to Charity so what % should be in Roth

Post by increment »

packercd wrote: Fri Sep 03, 2021 1:58 pm I thought I might start converting some to Roth but when we die the charities will not have to pay tax so I figure that moving it might not be wise.

We really don't have a lot of need for the money with a paid for home and pensions along with Social Security. Right now it's kind of our insurance against long term care. Anyone in a similar situation? Thanks.
If you have really, really high long-term care expenses because of medical reasons, they might be tax deductible, but of course you need to have taxable income (e.g., withdrawals from traditional IRAs) in order to see any financial benefit.
retire2022
Posts: 2126
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Leaving all to Charity so what % should be in Roth

Post by retire2022 »

packercd wrote: Fri Sep 03, 2021 1:58 pm My wife and I have a little over $1 million in low cost Fidelity index funds in our IRA's with around 10% in Roth. Not really much in taxable accounts. We have no children and plan on leaving it all to charity. I thought I might start converting some to Roth but when we die the charities will not have to pay tax so I figure that moving it might not be wise.

We really don't have a lot of need for the money with a paid for home and pensions along with Social Security. Right now it's kind of our insurance against long term care. Anyone in a similar situation? Thanks.
I am single 61, just retired, I have 33.94 in Roth, and 63% in pretax 457, and the rest in taxable, my assets including two homes, will be left to beneficiaries and next of kin.

my portfolio is 2.6 million and net worth north of 3 million, which includes residences and personal effects.
niagara_guy
Posts: 183
Joined: Tue Feb 11, 2020 8:32 am

Re: Leaving all to Charity so what % should be in Roth

Post by niagara_guy »

I would assume that if you leave all your t-ira money to a qualified charity in your will that there will be no tax due but I am not sure.

When you turn 70.5 you can do QCDs (qualified charitable distributions) up to 100k per year from a t-ira.

I see no advantage to converting t-ira dollars to Roth if you are going to leave the money to charity. On the other hand, you might be able to convert some without paying extra tax if your income is low.

Might be good to discuss this with your tax advisor. If you know the charity you are going to donate to they might be able to help you plan ahead.
Chip
Posts: 3517
Joined: Wed Feb 21, 2007 4:57 am

Re: Leaving all to Charity so what % should be in Roth

Post by Chip »

We are in a similar situation, with most going to charity.

You didn't mention if you are currently facing RMDs from your tIRAs. If not, have you figured the tax bracket you'll be in then vs. now?

We've converted enough that under current law a surviving spouse won't be paying a much higher tax rate, despite single filing status. That is a reason often cited here to favor conversions.

I view our Roths as a safety valve when confronted with lumpy spending where we might otherwise jump a tax bracket if all was drawn from the tIRAs. Decide if this is an issue for you and whether the 100k you currently have is "enough".

For LTC funding it is best to have the money in the tIRA for the tax reasons mentioned above.
SuperTrooper87
Posts: 155
Joined: Tue Jan 26, 2021 6:42 am

Re: Leaving all to Charity so what % should be in Roth

Post by SuperTrooper87 »

packercd wrote: Fri Sep 03, 2021 1:58 pm My wife and I have a little over $1 million in low cost Fidelity index funds in our IRA's with around 10% in Roth. Not really much in taxable accounts. We have no children and plan on leaving it all to charity. I thought I might start converting some to Roth but when we die the charities will not have to pay tax so I figure that moving it might not be wise.

We really don't have a lot of need for the money with a paid for home and pensions along with Social Security. Right now it's kind of our insurance against long term care. Anyone in a similar situation? Thanks.
Hi. My name is also Charity. Nice to meet you :)
MrJedi
Posts: 1072
Joined: Wed May 06, 2020 11:42 am

Re: Leaving all to Charity so what % should be in Roth

Post by MrJedi »

If you don't need it and intend to leave it for charity, then the default answer is leave it as traditional and use QCDs to fulfill RMDs. I wouldn't do a single Roth conversion then.
Alan S.
Posts: 10811
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Leaving all to Charity so what % should be in Roth

Post by Alan S. »

If you knew you were going to pass in a short time, you wouldn't do any conversions.

But what if you are in good health and expect to live many more years. You would still probably convert less than those not leaving to charities, but you would convert some of your TIRA just to limit your own RMDs and future taxes for many years. Therefore, the key variable here is how long you expect to live, and for couples, how long will the last spouse to pass live?
dharrythomas
Posts: 1146
Joined: Tue Jun 19, 2007 4:46 pm

Re: Leaving all to Charity so what % should be in Roth

Post by dharrythomas »

Money targeted for charities should not be converted to a Roth. That is all cost and no benefit. You pay the tax and the charity gets less money. There is the option when you reach MRDs to do QCDs.
User avatar
cheese_breath
Posts: 10586
Joined: Wed Sep 14, 2011 7:08 pm

Re: Leaving all to Charity so what % should be in Roth

Post by cheese_breath »

If you have really, really high long-term care expenses because of medical reasons, they might be tax deductible, but of course you need to have taxable income (e.g., withdrawals from traditional IRAs) in order to see any financial benefit.
+1

I had several hundred thousand dollars in medical deductions that I paid through tIRA withdrawals during the 3 1/2 years DW was in LTC.
The surest way to know the future is when it becomes the past.
drzzzzz
Posts: 714
Joined: Sat Sep 22, 2012 9:56 pm

Re: Leaving all to Charity so what % should be in Roth

Post by drzzzzz »

We are in a similar situation. We have done some Roth Conversions since it is nice to have the money grow tax free and will leave some of the Roth funds to family. We are planning to leave much o our estate to charity so rather than converting more of our traditional IRAs, our plan will be to leave the traditional IRA accounts to charity. There is no real reason to pay taxes on it now by converting if it is going to charity. The only open question is what the RMDs will be when one spouse dies - in your case it sounds like you might not need the RMD or all of it, and in our case if the surviving spouse doesnt need it all, the plan is to do QCDs to lower taxable income.
lakpr
Posts: 8162
Joined: Fri Mar 18, 2011 9:59 am

Re: Leaving all to Charity so what % should be in Roth

Post by lakpr »

I would at least convert four years worth of expenses to Roth, or alternatively, up to the top of 12% bracket each year. My reasoning is that the tax rates are poised to go back to 2017 levels starting in January 2026. So there is a definite tax arbitrage to be had here, worth 3% of the amount converted. The existing 12% bracket will disappear and becomes the 15% bracket (3% difference), and the existing 22% bracket becomes the 25% bracket (3% difference again). Converting 4 years worth of expenses -- corresponding to years 2022 through 2025 -- will save you 3%.

Let that Roth be the last account you tap for living expenses, to give it the maximum time for growth.

Would you invest in a mutual fund that has a 3% back end load? By not converting to Roth now while the tax rates are low and almost guaranteed to rise in 5 years, you are in effect investing in such a mutual fund.
Chip
Posts: 3517
Joined: Wed Feb 21, 2007 4:57 am

Re: Leaving all to Charity so what % should be in Roth

Post by Chip »

lakpr wrote: Sat Sep 04, 2021 6:26 pm I would at least convert four years worth of expenses to Roth, or alternatively, up to the top of 12% bracket each year. My reasoning is that the tax rates are poised to go back to 2017 levels starting in January 2026. So there is a definite tax arbitrage to be had here, worth 3% of the amount converted. The existing 12% bracket will disappear and becomes the 15% bracket (3% difference), and the existing 22% bracket becomes the 25% bracket (3% difference again). Converting 4 years worth of expenses -- corresponding to years 2022 through 2025 -- will save you 3%.

Let that Roth be the last account you tap for living expenses, to give it the maximum time for growth.
The problem with this logic is that it is very unlikely that the tIRA will be totally distributed during the couples lifetime, so the 3% arbitrage only applies to withdrawals that are actually taxed at 15%. If they live a long time the conversions will probably pay out. But if those those LTC expenses appear or both are shorter-lived they probably won't.

I say this from the viewpoint of someone who has probably already converted too much at 15% and 12%.
lakpr
Posts: 8162
Joined: Fri Mar 18, 2011 9:59 am

Re: Leaving all to Charity so what % should be in Roth

Post by lakpr »

Chip wrote: Sun Sep 05, 2021 6:28 am The problem with this logic is that it is very unlikely that the tIRA will be totally distributed during the couples lifetime, so the 3% arbitrage only applies to withdrawals that are actually taxed at 15%. If they live a long time the conversions will probably pay out. But if those those LTC expenses appear or both are shorter-lived they probably won't.

I say this from the viewpoint of someone who has probably already converted too much at 15% and 12%.
But isn't that exactly the point? As long as the couple lives beyond 2026, the 3% arbitrage is realized. I am not saying convert everything in the traditional account to Roth, only 4 years worth of expenses. With a $1 million portfolio and assuming 4% withdrawal rate, this couple is living on a $40k expenses per year (plus SS plus pension if any). That means conversion of $160k at most, leaving 84% of the portfolio in traditional.
Chip
Posts: 3517
Joined: Wed Feb 21, 2007 4:57 am

Re: Leaving all to Charity so what % should be in Roth

Post by Chip »

lakpr wrote: Sun Sep 05, 2021 8:01 am But isn't that exactly the logic? As long as the couple lives beyond 2026, the 3% arbitrage is realized. I am not saying convert everything in the traditional account to Roth, only 4 years worth of expenses. With a $1 million portfolio and assuming 4% withdrawal rate, this couple is living on a $40k expenses per year (plus SS plus pension if any). That means conversion of $160k at most, leaving 84% of the portfolio in traditional.
No. We don't know how much older than 62 they are. OP said that they "don't have a lot of need for the money" due to SS and pensions, so they may have no need to withdraw from the tIRAs. If they die in 2026 without having made a tIRA withdrawal the taxes paid on the Roth conversions are wasted.

They already have ~100k in the Roth. That might be enough to cover any lumpy expenses. But more info from the OP is needed to get closer to an optimal decision.
lakpr
Posts: 8162
Joined: Fri Mar 18, 2011 9:59 am

Re: Leaving all to Charity so what % should be in Roth

Post by lakpr »

Chip wrote: Sun Sep 05, 2021 8:10 am
lakpr wrote: Sun Sep 05, 2021 8:01 am But isn't that exactly the logic? As long as the couple lives beyond 2026, the 3% arbitrage is realized. I am not saying convert everything in the traditional account to Roth, only 4 years worth of expenses. With a $1 million portfolio and assuming 4% withdrawal rate, this couple is living on a $40k expenses per year (plus SS plus pension if any). That means conversion of $160k at most, leaving 84% of the portfolio in traditional.
No. We don't know how much older than 62 they are. OP said that they "don't have a lot of need for the money" due to SS and pensions, so they may have no need to withdraw from the tIRAs. If they die in 2026 without having made a tIRA withdrawal the taxes paid on the Roth conversions are wasted.

They already have ~100k in the Roth. That might be enough to cover any lumpy expenses. But more info from the OP is needed to get closer to an optimal decision.
I think you and I are saying the same thing in different ways. A Roth conversion now is a bet, worth 3% of the amount converted, on their own mortality -- that they will live beyond 2026.

As for ages, in a prior post from 2016 the poster said he was 59 and wife was 65. Add 5 years, so currently the couple is aged 64 and 70 respectively. Using average life expectancy for both (78 years for males and 84 years for females), they have about 14 more years; I think the Roth conversion will pay off.
User avatar
Wiggums
Posts: 4240
Joined: Thu Jan 31, 2019 8:02 am

Re: Leaving all to Charity so what % should be in Roth

Post by Wiggums »

lakpr wrote: Sat Sep 04, 2021 6:26 pm I would at least convert four years worth of expenses to Roth, or alternatively, up to the top of 12% bracket each year. My reasoning is that the tax rates are poised to go back to 2017 levels starting in January 2026. So there is a definite tax arbitrage to be had here, worth 3% of the amount converted. The existing 12% bracket will disappear and becomes the 15% bracket (3% difference), and the existing 22% bracket becomes the 25% bracket (3% difference again). Converting 4 years worth of expenses -- corresponding to years 2022 through 2025 -- will save you 3%.

Let that Roth be the last account you tap for living expenses, to give it the maximum time for growth.

Would you invest in a mutual fund that has a 3% back end load? By not converting to Roth now while the tax rates are low and almost guaranteed to rise in 5 years, you are in effect investing in such a mutual fund.
Not a bad option to consider. We don’t have a lot of info on the OP. We are doing some Roth conversions. Especially before the taxes revert back to the old levels. The future is unknown. What looks like excess now, could be spent down quickly with a significant illness. It doesn’t have to be an all or none decision.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
Topic Author
packercd
Posts: 5
Joined: Sun Mar 13, 2016 2:23 pm

Re: Leaving all to Charity so what % should be in Roth

Post by packercd »

Thanks for all of the ideas.

I think I need to build a spreadsheet to figure some of this out. Seems to me that the highest risk is living a long time and getting pushed into higher tax brackets from RMDs even with QCDs as they could put us over the current $100k limit.

My initial gut feeling is I need at least 25-33% in Roth and only have 10%.
Lee_WSP
Posts: 5732
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Leaving all to Charity so what % should be in Roth

Post by Lee_WSP »

Whatever lands you at no further taxes. With that TDA balance and no estate planning intent, there is little reason to bother with conversions. However, converting up to your irmaa bracket each year would not be detrimental or unwise either.
Mr. Rumples
Posts: 1469
Joined: Sun Aug 25, 2019 7:16 am

Re: Leaving all to Charity so what % should be in Roth

Post by Mr. Rumples »

There are different ways to structure this so that you and your wife are taken care of and if money is left over, it can go to charity. I've used an affiliate (free) of this group:

https://www.cof.org/page/community-foundation-locator
“To be a Virginian either by Birth, Marriage, Adoption, or even on one’s Mother’s side, is an Introduction to any State in the Union, a Passport to any Country, and a Benediction from Above.”—Anonymous
Alan S.
Posts: 10811
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Leaving all to Charity so what % should be in Roth

Post by Alan S. »

packercd wrote: Mon Sep 13, 2021 10:16 pm Thanks for all of the ideas.

I think I need to build a spreadsheet to figure some of this out. Seems to me that the highest risk is living a long time and getting pushed into higher tax brackets from RMDs even with QCDs as they could put us over the current $100k limit.

My initial gut feeling is I need at least 25-33% in Roth and only have 10%.
Yes, the worse case scenario for no conversions due to the surviving spouse donating all to charity is that the surviving spouse lives many years filing single with it's higher tax rates for the same amount of annual income. If that spouse lives into their 90s, they will have RMDs of over 10% of value each year. There might not be much left for the charity.

Thus the recommendation to consider limited conversions determined by mortality assumptions, but obviously less than if the IRA was being left to individuals.
Post Reply