Financial advisor outlines year-end steps on RMDs and Roth conversions

SAVANNAH, Ga. (WTOC) - Vann Doubleday, a Thrivent financial advisor in Savannah, said people should look at required minimum distributions, charitable giving and Roth conversions as the year ends. Doubleday, who spoke in an exclusive interview with Mike Cihla, said he is not a tax advisor and that the discussion was tax education.

Required minimum distributions

Doubleday said money put into tax-deferred retirement plans, such as an IRA or a 401(k), comes with an agreement with the IRS. People agree not to touch the money until they are at least 59½, he said. They also agree to take money out each year, known as a required minimum distribution, or RMD, based on certain ages, he said.

The age used to be 70 and was moved to 73, Doubleday said. He said it is now between 73 and 75, depending on a person’s birthday.

“They really don’t care what you do with it once you take it out. They just want you to pay taxes on it,” Doubleday said.

Charitable giving

Doubleday said people can make a qualified charitable distribution, or QCD, starting at age 70. A QCD can satisfy the IRS requirement for taking money out of a retirement account, but the gift is not taxable to the donor, he said.

Doubleday said people who are not over 70 can make other charitable gifts. For tax purposes, those gifts must be made before Dec. 31, he said.

Gifts do not have to be cash, Doubleday said. They can include stock, appreciated securities, gold or cryptocurrencies, he said.

He also described what he called a bundled gift. Doubleday said many people no longer itemize deductions, so they may not see a tax benefit from smaller yearly gifts. A person who normally gives $10,000, $15,000 or $20,000 a year could instead give $50,000 or $60,000 at one time, he said. That gift could go to a donor-advised fund or directly to a charity and could represent multiple years of giving.

The donor gets the tax deduction for the gift and chooses when and how the money is distributed, Doubleday said.

Roth conversions

A Roth conversion moves money from an IRA into a Roth IRA, where it can grow tax-free, Doubleday said. The person pays taxes in the year of the conversion. Roth money is not subject to required minimum distributions, he said.

“I want to pay the taxes now to not have to pay the taxes later,” Doubleday said, describing the reasoning behind a conversion.

Doubleday said a person could pair a bundled gift with a conversion by using the deduction from the gift to offset taxes on the converted money. He said the strategy is not right for everyone and depends on each person’s situation.

Doubleday said current tax rates are the lowest in a long time. He said the highest tax bracket is 37% and that an average family making $100,000 to $200,000 a year is in the 22% to 24% bracket. A person who has just entered a bracket may want to use the remaining room in it for a conversion, he said.

Some years may not be a good time for a conversion, such as when a person needs money for a roof repair or a new car, Doubleday said.

Starting early

Doubleday described the rule of 72. Dividing 72 by an interest rate shows how quickly money would double in the market, he said. At 7.2%, money would double every 10 years, and at 10%, every 7.2 years.

Doubleday said people in their 20s and 30s who put money into a Roth IRA have time for it to grow tax-free. He encouraged younger people to start an IRA or contribute to a 401(k) at work, even if it is $100 per paycheck.

He cited what he called a Dave Ramsey statistic. A person who starts between ages 18 and 20 and puts $100 a month into a Roth IRA would contribute $1,200 a year, Doubleday said. He said that would grow to $1.2 million by age 65 if left to compound.

Doubleday said people who have built wealth often say they wish they had started sooner.