by Kate Alves, CFP®, President of Barry Investment Advisors
While the market did not perform well in 2022, with some strategic thinking about your financial plan for 2023, you could save money while also making a charitable gift to a nonprofit organization of your choice. Now could be a good time to consider converting a portion or all of your traditional IRA or 401(k) to a Roth IRA. Although you will pay income tax on the converted amount from the traditional IRA to the Roth IRA, you will also be setting aside a future option for tax-free income. Pairing a Roth conversion with a charitable donation in the same year can offset the increase in taxable income triggered by the conversion.
While you’re considering the conversion—and depending on the size and potential tax triggered by the conversion—you could consider frontloading multiple years of giving into a donor-advised fund (DAF) in the year of the conversion. For example, if you would like to set aside $50,000 to give to charities over several years, you could potentially set up a DAF that would allow you to reap the tax benefits now for the entire amount of the donation, thus offsetting the income tax incurred with the Roth conversion. This strategy is sometimes called bunching. A consultation with your Financial Advisor and CPA is recommended to determine if you could benefit from this strategy.
Giving smarter by picking the right asset can have a lasting impact in the future. As the market recovers, not only will you be on the tax-free side of the equation with your newly characterized Roth IRA, your initial tax-advantaged charitable gift also has the potential to grow, giving you more funds to support your favorite causes in the future. No matter how the market behaves, working with your advisor and tax professional and leveraging this giving strategy can help you weather the storm, while making a difference with charities that you care about.
Kate Alves is a CERTIFIED FINANCIAL PLANNER™ and President of Barry Investment Advisors. If you have questions about this or other financial strategies, she can be reached at kate@barryia.com
The SouthCoast Community Foundation manages more than 200 donor-advised funds, with the goal of matching donors and resources with community needs for the benefit of our region. If you’d like to learn more about setting up a donor-advised fund, please contact us at info@southcoastcf.org