I specified I wanted to make equal and annual charitable contributions starting at my age 72 through age 79. Wife would start doing the same starting at her age 72 through 90. But when I go to Review> Tabular Projections> Expenses page and click on the Charity tab, it shows only my first year as a QCD (under third column) and all the rest appear as Non-QCD donations? Wife QCD's log as QCD's for first 5 years but then also turn into Non-QCD's every year after that. What could be causing this?
You're not running out of money in the tax-deferred account that the QCD is coming from, are you? Other than not yet being 70-1/2, that's the only condition that the user manual says will cause a QCD to revert to a regular charitable donation.
Roth conversions clearly impacting charitable contributions that qualify as QCD's. When I disable the roth conversions my intended QCD's all seem to qualify (appear in the right column). When I enable roth, that's when many QCD's change to "non-QCD" status.
So maybe my plan for doing roth conversions f and ALSO QCD's are unintentionally depleting the account such that many years of QCD's no longer qualify as such?
I assume I can do QCD's in the same year as a roth conversion. The challenge may be striking a balance between the two? Or, foregoing Roth conversions altogether (we do not have heirs to provide for) and also because we prefer our assets to go to charities.
As I recall, in any given year, QCD's are applied before Roth conversion.
If/when Roth Conversions (or other withdrawals) deplete the source account, any QCD's in later years will be converted to regular charitable contributions.
I believe there is a limit on annual QCD's (currently $105K) but Pralana Excel and Online do not currently enforce any such limit, though we could add it in Pralana Online if there is interest.
Charlie Stone, Pralana
@cstone Hi Charlie - I seemed to recall that when I ran the "optimize" feature it has me converting the entire IRA in just 5 years). I can still specify on the Charity page that I want to do QCD's but when I check they are almost all "recategorized" as non-QCD charitable contributions. There goes my advantage in offsetting RMD taxes.
So it would be very informative to those of us planning to leave a sizeable portion of our IRA's to charities as QCD's (but maybe also want to convert SOME portion to a roth) to maybe let the QCD (limited to the $105k per person amount) take priority and then the roth conversions are reduced accordingly. Lets say I have $500K in an IRA, and over a 10 year period I specify giving $40k each year to charity (assuming I'm also age-eligible), leaving $100k left over to convert. The Optimize feature would only use that amount to plot conversions.
Or is that too simple a solution? I'm no expert.
I understand what you are saying. The scenario projections are calculated year-by-year, one after the other, including Roth Conversions.
Suppose you are single and your plan starts in 2025, when you are 71, and you have $100K in an IRA and specify QCD's of $10K/yr.
Further suppose you specify Roth Conversions starting in 2025 and going for 5 years with a max Ordinary Income tax bracket of 35%.
Also suppose your income before any Roth conversions is very low.
In 2025, Pralana will:
- Add whatever growth there is to the $100K IRA balance...say $3K.
- Subtract the $10K QCD, leaving about $93K in the IRA
- Look at the headroom between your existing ordinary income and the top of the 35% which will be number much larger than your $93K IRA available balance.
- Do a Roth conversion of $93K, depleting your account.
- There is no provision to look into future years and say "wait, I need to not convert so much, I might need it for a QCD next year or in 5 or 10 years"
In 2026, there will be no R/C as the IRA was depleted in 2025.
Now for the Optimize...when you run the Optimize, Pralana will recalc your scenario (all years) perhaps hundreds of times using many different permutations of ordinary tax bracket limits in the R/C years. Some of these iterations will have low brackets, leaving money for the QCD's in future years.
In the end, the iteration with the highest final effective savings will be consider optimal. Your charity will still get the $40K/year, but it may not be from a QCD.
Try this:
1) Run the R/C optimizer.
2) Run a Monte Carlo or Historical analysis which will save the 'optimized' R/C parameters in the baseline settings. Why you have to run MC or HA is a carry-over from PRC Excel. Someday I will just give you a button to save current settings as baseline.
3) Go back to the R/C page and lower your ordinary tax brackets so that the account is not drained so quickly and your QCD's are performed as you intend.
4) Check the Roth Conversion Results: Active vs Baseline and see which produces the higher final effective savings.
I would be interested in your results.
Related notes:
There has been some discussion about adding a feature to the R/C to allow you to specify a minimum post-RC balance on the R/C so as to protect some portion of the IRA balance(s) from being converted. For example, you could specify to do the R/C per your limits, but leave at least $40K in the IRA.
There is also a pending feature request to allow you to specify the exact R/C amount in a given set of years. This would likely be done by extending the Scheduled Withdrawals feature to be Scheduled Transfers and allow you to specify the "To:" account, in this case From your IRA To your Roth.