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DAF and Roth conversion paired together

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  • Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 151
    Joined: 01/08/2018

    I haven’t yet funded a DAF but am considering one for 2019 to bunch multiple years worth of charitable contributions together since in 2018 my personal deductions won’t exceed the standard $24K deduction for MFJ. In researching the DAF at Fidelity I found this:

    https://www.fidelity.com/viewpoints/tcm:526-17674-234995.comp

    If I make a Roth conversion equal to the DAF then the net change to my taxes should be zero. Just curious, has anyone tried this?

    #196505 Reply
    Liked by Tim
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 822
    Joined: 01/11/2017

    DAF offsets any earned income as well. It’s kind of just mental accounting. But sure, it’s a way to match deductions with taxable earnings and particularly attractive if the conversion would bump you up a tax bracket.

    #196506 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 267
    Joined: 06/12/2017
    If I make a Roth conversion equal to the DAF then the net change to my taxes should be zero.

    Click to expand…

    You are correct. If you do a $50,000 Roth Conversion and also did a $50,000 charitable contribution to your DAF, in the same year, they will offset each other and have no impact on your taxes. That is, assuming your deduction is not so large that your charitable contribution is limited and some of it is carried over to the following year(s).

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #196530 Reply
    Liked by GasFIRE, Tim
    Andrew Musbach Andrew Musbach 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 17
    Joined: 10/19/2017

    Keep in mind the DAF contribution is an itemized deduction/below-the-line. The Roth conversion will increase your AGI, which may not be an issue for you, but could be for some (like if you’re worried about IRMAA on Medicare part b/d premiums).

    Andrew Musbach, CFP® | [email protected]
    MD Wealth Management, LLC | http://www.mdwmllc.com

    #196552 Reply
    Liked by GasFIRE
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6929
    Joined: 01/09/2016

    We have a client currently planning this. As Andrew Musbach stated, the itemized deduction may not directly offset the conversion due to their differing tax attributes. Not as easy as saying it is a direct offset because there are most likely some offsets you’re not considering. Best to run tax projections with your CPA at different levels to determine the optimal amounts for your situation. Of course, you have the rest of the year to tweak the amounts and you can do a final projection in December and adjust.

    If you can fund your DAF with appreciated stocks/funds, you get an extra bonus. I’ve mentioned this in another thread, but some clients had a taxable account that was seriously undiversified with a lot of unrealized gains. We set up a DAF, they contributed, and we were able to rebalance, tax-free. Because they make significant contributions each year, this was a triple play for them. They have already made their first donation from the DAF and are very happy with the whole process.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 151
    Joined: 01/08/2018

    Thanks to all for noting the issues to consider. DAF was never really on my radar as I had always itemized my deductions before the recent tax changes. The recent thread on Tithing and Taxes got me thinking about using DAF since for 2018 I didn’t have enough to itemize, just used the standard deduction of $24K. I’ll be reaching the age milestones of 59.5, 65 and 70.5 very soon. I’m just starting Roth conversions based on space available in the 24% tax bracket and below so this seems like a good opportunity to accelerate the process.

    #196610 Reply
    Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 151
    Joined: 01/08/2018

    We have a client currently planning this. As Andrew Musbach stated, the itemized deduction may not directly offset the conversion due to their differing tax attributes. Not as easy as saying it is a direct offset because there are most likely some offsets you’re not considering. Best to run tax projections with your CPA at different levels to determine the optimal amounts for your situation. Of course, you have the rest of the year to tweak the amounts and you can do a final projection in December and adjust.

    Click to expand…

    Since I’m eligible for the 199A pass-through deduction, would it be correct to assume that to the extent that a Roth conversion were to push my income into the $321,450 to $421,450 range for 2019, I would lose a portion of that deduction? A DAF contribution would offset my income tax but not preserve the at-risk portion of the 199A pass-through?

    #197878 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6929
    Joined: 01/09/2016
    Since I’m eligible for the 199A pass-through deduction, would it be correct to assume that to the extent that a Roth conversion were to push my income into the $321,450 to $421,450 range for 2019, I would lose a portion of that deduction? A DAF contribution would offset my income tax but not preserve the at-risk portion of the 199A pass-through?

    Click to expand…

    No. Taxable income is what matters for section 199a. So, if the Roth conversion pushed your gross income into the range you listed, DAF contributions could lower it (if they push you over the standard deduction threshold).

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #197883 Reply
    Liked by GasFIRE

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