In this episode, Justin and Jared answer a listener's question from a 70½-year-old with over $5 million in IRAs who wants to manage their lifetime tax liability. They walk through the math of Required Minimum Distributions (RMDs) and compare and contrast using Roth conversions, qualified charitable distributions (QCDs), and donating appreciated stock.

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Welcome to Financial Planning for Oil and Gas Professionals, hosted by certified financial planners Justin Brownlee and Jared Machen of Brownlee Wealth Management, the only podcast dedicated to those of you in the oil and gas profession to help you optimize investments, lower future taxes, and grow your wealth.

Learn more and subscribe today @brownlee wealth management.com.

Welcome back to another episode of FPO O&G Financial Planner for Oil and Gas Professionals.

This week on the podcast, we're going to answer a listener question, very specific kind of case study esque, about a 70 and a half year old with IRAs that exceed $5 million.

Justin, we'll talk about the question, specifically talk about it, and just kind of brainstorm a couple planning strategies.

So shout out to you, Mark, for sending us his listener questions.

I feel like our army of listeners have been great with the questions recently made our job really easy.

Jared, the listener questions have exploded.

Wonderful question from, I believe is that maybe two episodes ago Mark sent us a great question.

It also kind of cracks me up.

This is such a specific question, Jared, and this is just right in the vein of fpong.

This is really what we've kind of been about for the last six years, which is answering really kind of comically specific tax or planning questions that are probably only questions that you're asking if you spent a number of years in oil and gas, which inevitably means that your benefit structure made your current balance sheet look like this.

So this is a very specific question.

It's not relevant to over 99% of America.

Right.

But it's wildly relevant if you're in oil and gas, thanks to the benefit structure.

Yeah.

So our podcast is fpong, but like, I feel like our army of podcast listeners, I'm going to name them now.

They're the FPOGs, the financial planning Original Gangsters.

So thank you to our FP OGs.

Notice the break in the spacing there.

So we appreciate you and thanks for this episode.

All right, Justin, before we jump in, it's surprise segment time and it's time for you to ask me.

Yep, I'm due.

I've got to ask you a question, Jared.

We're going to dive right in.

We're going to go a little bit serious with this question.

Jared, I want to hear what is your most memorable, most meaningful day that you've experienced in your life, But I'm going to give a qualifier because I think a lot of people would hear that question.

They're going to immediately go to my wedding day, my first date with my Wife.

Something like that.

You have to remove your wife as an option from this.

So most meaningful, most memorable day.

So I can't use wedding day.

Okay, you can't use wedding day.

Obviously.

This could trigger a day with you have one child currently, so it could be with your son.

But I wanted to put that perimeter on it.

What do you got?

Of course, it was the day Ellis was born, but that's kind of cliche.

I'll use what I call an independent day.

Right.

A day independent of anyone else.

I would say it was in eighth grade when our football team won a national championship in Florida.

It was American Youth football, actually bigger in terms of participation than Pop Warner.

Wow.

And I was on a team that won a national championship.

I didn't know this.

Yeah, it was like, a big deal.

We won in double overtime.

What position did you play?

I played tight end, and I was a team captain.

I weighed less than £100 in eighth grade.

You laid?

Yeah.

And I was a team captain, and I was a starting tight end.

And that's kind of me in a nutshell.

Right.

Like, I'm a grinder.

Like, I'm not the most, you know, I'm not the biggest specimen, but I will.

I will outwork you.

And so that was just kind of like a really rewarding moment and a lot of hard work.

And, like, I played football starting in second grade, all the way to eighth grade.

Didn't play in high school because eventually the size caught up to me.

But that was really kind of a cool moment where, like, the delayed gratification really materialized in a cool way.

And I was just kind of awestruck by the moment.

And it was really fun and special to be a part of that.

And just the culmination of a goal and a passion and years and years of hard work and honing my craft.

I love that when you look at Jared today, you're not immediately thinking, Gronk tied in Bill type thing.

Exactly.

What a cool memory.

What a cool moment.

Yeah.

Well, with that, let's Gronk smash into the next topic.

So.

Love that transition credit where Credit.

Okay.

All right, so I'm going to read the listener question, and then there's a lot that's not in this question that I think we should kind of unpack and implications that I want to kind of just.

We'll inspect the question and then we'll get into planning mode.

Sound good?

Okay, so the question is, what is the best course of action for married retirees who are at least 70 and a half with regular IRAs that currently exceed $5 million make charitable contributions to a donor advised fund or direct to charities with their highly appreciated stock held in a taxable account with embedded long term capital gains or with QCDs from the IRAs.

What are the considerations?

At age 73, the RMD amount is likely to be more than needed for living expenses given Social Security and other taxable pension income.

Wow.

I love how precise that question is.

And the implications for this question, Jared, are huge.

So this really is at the heart of great lifetime tax planning.

If you're retiring from an oil and gas company, it's very possible, likely that your balance sheet is going to move in the direction of this question.

And so this is really fantastic.

And there's a lot of moving parts that I think I'm excited to tackle here.

Yeah, I think just kind of setting the table, it's important we think about what's implicit in this question, right?

And I think one of the things is, hey, there's an implication here that there is material assets outside of these IRAs, right?

Because like my thought is, hey, if IRAs that exceed $5 million, and I'm thinking about how much do I take, how much do I give, there's an implication that I have kind of excess, right?

There's probably some qualified money or, sorry, some taxable money and some Roth money, right?

So there's discretion over how much of this bucket is used for living expenses, right?

Because if, if this was all of the money they had, the answer is pretty similar.

You're going to take way more than the RMD because you need it all for living expenses.

But the way this question was worded leads me to believe that there's an underlying balance sheet in above and beyond what's in this ira.

That's a really important distinction, Jared.

Really quick example here.

If someone is 70 and they have a $1 million IRA.

So let's, let's start with that kind of basic example.

But Jared, you just brought up spending.

What if their expenses are, let's say, 100,000 a year?

Well, the RMD is not even going to hit their total expenses.

And so taking the RMD is a pretty, just simple situation, right?

Like they don't need to solve for a whole lot.

The required distribution from their $1 million IRA is going to play a meaningful role in their income and they need it.

They have to have that contribution to their income to meet their living expenses.

And so that's super simple.

Where it gets tricky is if you have an ira, that's really really large.

Well then you're going to be in this situation where you're thinking, I have to take this rmd, I don't need the entire rmd, what do I do with the excess?

And how do you think about giving to charitably, how do you think about your next 10 years of tax returns if you could give to charity from your IRA versus a non retirement brokerage account?

So yeah, a lot of good stuff here.

Yeah.

And I think like a good place to start before because I think we're talking about tools, but I think kind of beginning with the end in mind is a good place to start.

So I just kind of want to map out the trajectory of this because I think this will help reverse engineer and give us some context for kind of what do I do today in light of this reality.

So I did some analysis.

And so if you're 70 and a half and you have about a $5 million IRA, your RMD, your first RMD is just over $180,000.

Let's say you have the luxury of only being able to take the required minimum distribution.

Okay, what does that mean happens to the IRA over time?

Right.

And so I kind of ran a quick analysis.

Let's assume a couple things.

Let's assume 7% investment returns and let's assume you're only taking the required minimum distribution.

My first two questions is, okay, let's assume somebody lives to age 95, what is the RMD and what is the terminal portfolio value?

So what are the terminal value of that IRA?

So by age 95 your required minimum distribution is $603,000.

Right.

And for those of you that don't know, the RMD is the required percentage of the account that you have to take, you have to distribute.

Right.

It's a pre tax account, becomes taxable when you distrib distribute it.

That percentage is based on life expectancy.

So as you get older, your life expectancy goes down, meaning you're expected to take a higher percentage of the account.

By age 95, your required minimum distribution is over in excess of $600,000 and your terminal portfolio value is 4.9.

So again, as the RMDs pick up and get more aggressive, you know, naturally that account will get depleted faster.

But still you kind of assuming you're only taking the RMD and have 7% investment returns, you have a very similar asset that you started with in terms of the size of that asset on your balance sheet.

Justin, what does that make you think of and why do you think it's important to understand that before we start just providing advice of the various different ways you can solve around this, a.

Couple things come to mind.

If you are forced to take $600,000 in one year, that's going to be a lot of taxable income.

Jared, if you wouldn't mind, on our notes, scrolling back down, you made this point.

I want to make sure our listeners hear this first.

A lot of you listening might already know this.

If you don't, I'll be brief.

RMDs are not a static calculation.

So a lot of people think, well, the rmd is about 4%.

That's directionally true.

I guess it's less than 4% year one.

And then the RMD picks up each year.

Like you mentioned, Jared, your life expectancy is obviously changing as you get older and the percentage that you're required to take from the pre tax retirement account goes up.

So there is kind of a trajectory on this table.

For those of you just listening to us, let me make sure that I kind of paint this picture appropriately.

The account, as you can imagine, it kind of maxes out in your 80s.

And so the 5 million, even though you're taking hundreds of thousands of dollars every year from it, well, it's still growing.

It's compounding and, and it's getting up to six and a half, even over six and a half million.

But then you do hit this point around 85, where 86, 87, you're taking so much from the account that the account is no longer going up with an assumed 7% growth rate.

It begins to go back down a little bit because the RMD in your late 80s and 90s is a huge portion.

Jared, what comes to mind is your required income that you're taking from, it keeps going up.

But a thing that I want to point out, your tax filing structure could change while this goes up.

And so part of it is, hey, what tax rate am I going to owe on a $600,000 RMD?

But there's this whole other can of worms.

That's what tax rate will I pay if I have to take out 600,000?

And I'm now a single taxpayer.

So that's a big dynamic.

Yeah, I think that is huge.

We've talked about this in a prior episode, the IRA tax time bomb.

But it's important to kind of think about, okay, $600,000, okay, that's a lot of money for married filing jointly.

That is an insane amount of money for a single filer.

Right.

And so thinking through what's the probability of me being in one tax rate, which is married individuals filing jointly versus a single filer.

Right.

The brackets are essentially cut in half.

Right.

And again, these are going to move up with inflation.

So it's hard to know exactly where they're going to be 25 years from now.

But right now, 24% bracket for married filing jointly, you know, that's $394,000 and for a single filer, that's $197,000.

That's huge.

Right.

But then, but then it kind of gets into this other tangential question of hey, what does the tax picture look like then?

But also, if you have the flexibility to just take RMDs, your beneficiaries will likely inherit this asset.

Right.

And we talk about this a lot with the IRA tax time bond with tax cuts and jobs act, the stretch.

So being able to take annual disbursements over your life expectancy.

So if I inherited my parents ira, my ability to take that over my lifetime, that has been eliminated.

For non designated beneficiaries, most kids of parents are.

There's a few exclusions and we talk about that in a prior episode.

We'll link to it.

Assuming that I'm not an eligible designated beneficiary, I have to take that account over 10 years.

Let's take this case study a step further.

Let's say, okay, so at 95, I die with a $4.9 million Iraq, okay.

And I have two kids.

So each kid is going to get half of that IRA, but that IRA is going to continue to grow.

Let's say it's 7% and I have to deplete it over 10 years.

And so I did a kind of just a 10% payment calculation of, okay, if it grows at 7% and I'm taking equal installments to get the terminal portfolio value down to zero.

And it's never going to be that precise.

But assuming directionally that that's right, each beneficiary is going to have $349,000 of income from this Iraq.

And Justin, what is going on in the life of the inheritor?

Like what would you estimate about their tax situation?

You have to assume that it's possible.

The person inheriting your IRA, worst case scenario, Jared, they could be 51 to 54.

They could be making more money than they've ever made in their life.

So they could be in their peak earning years and they are already paying a lot of income tax.

And then this inherited IRA kicks off a required minimum distribution that's Tacked on top of their hiring.

All this to say, right?

This doesn't, this is just context to frame the problem.

I think Mark is asking the right question, right?

Which is, hey, what do I do with this?

Because if you look down the pike, you know, taking the RMD doesn't really put a dent in it and creates a lot of unintended tax consequences.

He kind of mentioned a few things here.

Making charitable contributions to a donor advised fund or directly to charities and then kind of the trade offs of, hey, I can use appreciated stock and do that.

But before we get into the gifting, because that is just probably one tool in the tool belt.

What are kind of the tools and options available to somebody that says, hey, I realize I have an issue, I don't need to take more than the rmd, but this is kind of, kind of balloon and I don't get super excited about paying tax.

Now.

What are the tools in the tool belt that somebody can begin to tackle this problem with?

You know, Jared, the first thing that I want to talk about with the tools to combat this is you might be listening to this at age 35 or 40, 45, and you might be thinking, this episode's not overly relevant to me, but I actually do want to make a really important point to that.

If you are younger, it's easy to look at some of the tax planning content we put out for retirees and you come to the conclusion that a lot in our generation has come to.

And that conclusion is, I've got a load up on Roth, right?

I need to be making Roth contributions.

I do want to say we love Roth accounts, but if you are at a really high earnings situation right now, today, you really may not need to do Roth and you probably should make your elective deferrals pre tax and then you can absolutely fill in the margins with after tax conversion.

So backdoor, mega backdoor Roth building strategies.

But Jared, I just want to first start with that.

If you're making a ton of money in your 40 and you're hearing this thinking, hey, I don't want to build a tax time bomb.

I would, I would maybe pause on that because the reason we got into this situation now where so many oil and gas retirees have really big pre tax IRAs, well, it's because they were effectively getting a double dipping dynamic between their 401k and a pension.

And the pension isn't taken as an annuity, it's taken as a lump sum.

And so when you think about the all in limit that the IRS allows to go into a pre tax 401k.

I mean it's 60, $70,000 plus.

So you are seeing a ton of money go into pre tax qualified retirement plans.

And then that's not the only source.

It's really that maybe not times two, but there's a whole separate pension dynamic that is also growing, adding towards the pre tax bucke.

So that is how you get these massively sized pre tax IRAs.

It's all because of the benefit structure.

And Jared, what's been the biggest change in benefits over the last 20 years?

Everybody's going to equity compensation.

Right?

Equity and cash just get it off the balance sheet.

There has been a trade.

The trade is pensions.

They're out.

Pensions are a thing of the past now to be clear, they're still there for a ton of 35, 40 year olds, but it's in the process of getting removed.

And the trade is pensions, you're out.

Equity compensation, you're in.

Equity compensation is hitting your balance sheet not as a qualified retirement plan, not as a pre tax or Roth retirement plan.

It's hitting your balance sheet as a non retirement brokerage asset.

So if that's your situation at all, you can probably load up on the pre tax deductions today.

And yes, do backdoor Roth when it makes sense, if it makes sense.

But I don't think you need to be so concerned because I think 30 years from now we're not going to be dealing with retirees that had massive pre tax 401ks and massive pre tax pensions.

Yeah.

And that's really why you need to do the analysis.

Right?

Yeah.

Because the composition of your balance sheet in terms of pre tax Roth brokerage is very different for somebody accumulating today, working at the same company, working at ExxonMobil.

Right.

Their benefit structure is just going to be vastly different.

And so we have seen people that basically hear about Roth to hear tax free growth and then they do a big conversion in their peak earning years.

Right.

And to solve the IRA tax time bomb that didn't actually exist in their scenario.

Right.

So like some analysis of foresight matters, but also for our younger audience.

Right.

Like figuring out what types of assets you're inheriting when just hey, how do I optimize the balance sheet?

Because you might not want the asset or.

Right.

Like your income situation may be very different than some of your siblings.

So them inheriting, you know, an IRA asset.

And you Herring, you know, there might be a tax arbitrage if you and your siblings have very different Income tax brackets.

So I would say for you know, accumulation and for kind of building a lifetime tax rate plan and with families with substantial assets, it's multi generational.

I think there's definitely stuff in here for you too.

I should go ahead and answer the question that you asked me five minutes ago.

And that is.

Well, you need to think about obviously how you're funding these retirement plans on the front end.

But then when you retire, massive toolbox is Roth conversions.

If you happen to have your equity compensation plan embedded inside of your 401k, then certainly net unrealized depreciation in UA is kind of the starting point for a lot of these pre tax retirement planning decisions.

But a huge tool will be Roth conversions.

How should somebody think about that?

Right, because like if you have 180,000 in income from the RMD, let's say you have more than you need.

And assuming the scenario where they have discretionary distributions so they have another bucket kind of creating income with a portfolio, it might be tough to get excited about those because hey, I'm already close to the 24% bracket assuming any amount of taxable income that's not super compelling and it's going to impact irmaa, right.

My Medicare premiums.

So like how do you, how does somebody think about that?

Because like, you know, it's, it's kind of tough.

When you're in the 10%, 0% income tax rates, Roth conversions feel like a no brainer.

But once you get to the 20 plus territory, it's like a little, a little grayer.

So how might someone begin to think about that?

You're right.

So if we're doing a Roth conversion at a 10% 12% tax rate, it's oftentimes just incredibly beneficial and makes, you know, just obvious sense to do it.

22%, 24%, that's a gray area.

32% for most people.

That's a no fly zone.

Right?

Most people you really want to avoid that.

But there are times where you do want to go ahead and convert at that level.

So we can talk about that as well.

But Jared, I think a lot of it comes down to understanding the movement and flow of money over, I'm going to just say a 40 year time period.

If we could visually picture with me that you've got three buckets of money.

If we just try to simplify this tax planning wise, it's really helpful to visually think about having three buckets of money.

The first bucket is, imagine this being a red bucket, Jared, to kind of say, hey, Warning, big tax implications.

The red bucket is Pre tax retirement, 401k, IRA, pensions, whatever, pre tax retirement.

The green bucket on the other end, that's Roth retirement assets.

For most retirees today because of the way the tax code was written and the way the tax code has changed over the years, they've got a ton of pre tax retirement assets, very little in the green Roth assets.

There's a third bucket, blue, and we'll, we'll call it blue.

The blue bucket is non retirement brokerage that is often much smaller than the pre tax retirement bucket.

But sometimes, depending on your level and your professional career could be equal or bigger than the pre tax retirement bucket.

But it's just about for everyone.

It's typically bigger than the Roth bucket.

So then the question is, if you're 55, maybe you've got a medium sized or a big blue brokerage bucket, but then you have a really big pre tax retirement bucket, very little Roth.

The question that we like to engage in, how should those buckets move over time?

And doing Roth conversions?

Taking retirement income typically leads you down a path where you drain the middle blue bucket, the non retirement brokerage bucket, because you are funding the conversion in the tax bill of the conversion from the red pre tax retirement over to the green Roth.

Yes, a Roth conversion is moving money from the red literally to the green Roth ira.

But the way that's facilitated is you're using blue brokerage assets to do it.

A huge part of our job is figuring out how fast should that flow of money happen between the red and the blue to the green bucket.

And then to this listener's question, to Mark's question here.

It's not always the end of the world if your RMDs are a higher amount than you need for living expenses.

As long as the marginal tax rate that your current year RMD and your future RMDs, as long as that marginal tax rate is reasonable, it's potentially okay.

And we see this all the time in our software and the analysis that we run.

You typically drain that blue brokerage asset in order to fund Roth conversions.

But then, Jared, what happens in the last 10 years of life?

You begin refilling the blue bucket.

RMDs hit such a high level and it inevitably the RMD gets more than you need to spend that you begin to take distributions required.

IRS is forcing you to from that red retirement bucket.

You're refilling that blue brokerage bucket.

And that is okay as long as you have a very cohesive thought through, mindful portfolio plan because that blue bucket, while it doesn't have a tax shelter providing, you know, protection from taxation on dividends, capital gains, whatnot, it does offer step up in basis.

And so if it's planned properly, excess RMDs are not the end of the world and they don't necessarily need to be something that you're afraid of.

But our listeners still hitting the nail on the head.

You do need to be mindful to make sure that if your RMDs from your pre tax retirement account, if they are more than you need to meet living expenses, well you better hope that they're not hitting at a super high marginal tax rate.

Yeah.

Or if they're inherited, what's the effective tax rate of the person inheriting them?

Great thoughts.

Right.

And I think you're touching on something important.

There's an art, if you will, the order of operations really changes and moves over time.

Right.

I think you know, pre tax IRA because of the elimination of the stretch.

Pretty big liability from a tax perspective to inherit inheriting a Roth you still have to take required distributions but because it's a Roth, you know, they're generally not taxable.

And again if I inherit a taxable portfolio there's a step up in basis and Texas being a community state property step up provisions are very nice.

Meaning If I paid $5 for a stock and it's now $10 at death, you know the 5 goes to 10 and so you know that person has no tax liability because 100% of their account is basis at the time of death.

So that's really great.

Justin, I don't necessarily think we need to overcomplicate this.

There is an option to just take more from the ira.

Right.

And I know that sounds crazy, but we could top out the 24% bracket at 197.

Right.

And you got 180 in RMD.

Maybe you begin to tickle some of the 30% bracket.

Right.

And my future beneficiary is going to inherit and have an RMD liability in excess of $300,000 a year plus their income.

There's a non zero probability that they're going to be in effectively a higher tax bracket.

Right.

And so you can also just slowly pick away at this problem.

Again, if you don't need the money, converting it is a great option.

But you can also just distribute it.

Right.

And you can fund a brokerage account or you can make gifts to kids.

Right.

Because you're also in the position where they're going to inherit assets that the Present value of those dollars that we've talked about in other episodes, this person also with 5 million in an IRA that they have discretionary spend over, they might have a lot in terminal portfolio value.

So taking the money out of the account and using the annual gift tax exclusion to get some money out of their estate, there might be a bigger estate tax benefit to just realizing the income tax today.

And again, I don't know all the specific nuances of the balance sheet, but that is an equation.

Right.

So the RMD is a required minimum.

Right.

But it's not the ceiling.

So you could also do that.

I don't think there's a single solve here, but that's just one of the many tools in the bucket.

Just what else would you add?

I'm glad you mentioned that, Jared.

So in the example from this question on the podcast, it's 5 million or so IRA.

You just mapped it out on the RMD schedule.

That's income, forced income of 182,000.

I believe we have to assume that there's Social Security on top of that.

And then they also mention taxable pension income potentially.

So let's say that total income is actually $250,000, $300,000 even.

You can make up to $394,000 and change still be at the 24% bracket.

Are you going to trigger additional Medicare issues with that?

Yes, but I mean, if your kids are buying a house and you want to help them with that process, or to your point, if you only have one child and they're going to eventually inherit one IRA, have to distribute it within 10 years, paying 24% on a marginal tax rate plus any Medicare extra charge.

It might actually be worth it.

Again, you could do two things with that gift to children.

It could just be gifting them cash and helping them with some current financial project they're working on.

Or to your point, Jared, you could invest it in a brokerage account, keep it in your name potentially, but let them know about it, kind of loop them in and then you know, they could get step up in basis decades later.

There's no single solve and then there's no single solve indefinitely.

Right.

So there's like half a dozen different things you could do in the speed and the sequencing is really a personal decision.

Justin.

I think we'd be remiss if we didn't mention bear market super conversions.

Right.

Like I think there is a case to be made if you get the once in a generation crash and things are down.

I don't know, we'll call a crash.

30 plus percent.

Yeah.

And you're paying in the 35% bracket.

And again, no way you're going to time the bottom, but let's say within three months of the bottom, so not quite the bottom.

The market is up multiples since then.

So you know the value of that conversion.

Even if that would have put your effective tax into the highest marginal bracket.

I mean money well spent.

If you're going to do Roth conversions, you could kind of annually groom it.

But another option is kind of the bear market super conversion where you say, hey, I'm going to go into a higher bracket than I typically target or a higher IRMAA bracket and really just kind of be prepared to be offensive.

The thought is if I convert, the conversion amount is the value of the securities at that time.

Right.

So if markets are temporarily depressed, which happens in a crash and will continue to happen.

So if I converted that and the appreciation and the rebound happens in an account that's tax free.

Right.

So that's really kind of the opportunity.

So hey, there's kind of some ongoing potential Roth conversions.

And whether you target a specific income bracket or a specific IRMAA bracket, great.

But then thinking kind of the more discretionary one off mega Roth conversion in a bear market, that's also a tool.

A good way to, to approach tax planning for kind of your 55 to 70 time frame, age wise.

I think a really good way to think about it is one, do you have a huge pre tax ira?

And by and large, I think if you have a $2 million IRA, that's a really healthy IRA, right?

I mean that's, that's a lot of money.

But you're probably not going to be subject to just crazy high tax rates with that.

So the mark for me is more if you have like 3,4 million, you have material tax planning that will benefit you to the tune of six or seven figures over your lifetime.

But then, Jared, if you have more than 5 million, 6 million, 7 million in an IRA, you have a massive problem on your hands.

And there's two ways to then think about it.

Do you retire and have no income?

Remember, that's kind of the fun thing about tax planning.

After you retire, for the first time in your life, you have agency over your tax return.

Right.

You get to decide it's not W2 income that's just coming.

You get to decide how much income do you want to realize in a way, certain year.

So if you have, you know, 10 years before you're 70, 74, and RMDs kick in.

That's a lot of time.

You might have time to do partial Roth conversions, but if you have a huge IRA or Jared, what if you retire at 68 and your window of potential conversions is really compressed?

That's a situation where you need to think about the mega, really large bear market conversions.

That's what you've got to think about then.

It's funny because, man, this question is so specific.

Depending on the balance of your ira, depending on the age that you're retiring and the other composition of your balance sheet, it's just so highly personalized, right?

Like you change the age and the optimal mix is just very different.

I do think now's probably a good time for us to just directly actually answer Mark's question of QCDs versus Do you give non brokerage appreciated stock to a charity?

And man, Jared, on that point, I love QCDs, but there are some drawbacks.

So a qualified charitable distribution is a distribution made from the IRA specifically to the charity.

Right?

Some things I love about QCDs, right?

It reduces taxable income.

The benefit is really clear.

Comparing that to gifting directly to charities, that's generally an itemized deduction.

So the itemized deduction has to be above and beyond what the standard deduction is.

So the actual value of the contribution might be lower depending on where your deduction sits at.

Normally, QCDS are great because it just reduces income right off the top.

And I think the quick point that we want all of our listeners to hear there, if you're not 75 years old, let's pretend you're not taking required minimum distributions.

Well, then you have to do this big calculation.

Not a big.

I mean, we do the calculation, but you just have to think through, am I going to actually get a tax benefit for this charitable gift?

The vast majority of Americans?

The answer is no currently, or do I?

Am I still taking the standard deduction?

What do we do in there?

QCDs are pretty awesome because you're just lowering taxable income.

That had to come to you anyway.

And then you get a double dip.

You can then take the standard deduction after seeing that lower taxable income hit to you.

QCDS can be introduced in concert with Roth conversions, right?

Like, you know, so you can have a, you can have a potentially tax neutral event, we'll call it, where QCDs, a gift directly to charity, can reduce taxable income and then kind of create some opportunity in an ideal tax rate for you to Realize some Roth conversion.

One quick quirk with that that I think we should probably mention.

This used to be uniform and lined up and then tax policy changed in the last, you know, handful of years.

Classic.

Classic.

So Jared, you know RMDs, they used to be 70 and a half.

RMDs are now, well, they're two things.

They're 73 or they're 74, depending on the year at which you were born is either going to be 73 or 74.

So that 70.5 RMD age that has actually stayed intact for the eligibility for qualified charitable distributions QCDs.

So even though RMD age is now higher, you're still eligible to do a QCD if you want, when you're 70 and a half.

Justin, let's talk about kind of what he talked about.

He got his nuanced, his understanding, hey, there's a benefit to gifting highly appreciated stock directly to the charity, which is another way, right?

Again, it's a different bucket.

You're pulling from.

You're not pulling from the pre tax bucket, you're pulling from the brokerage bucket.

But one of the awesome things is you get to avoid potential capital gains.

So for example, if I owned a position, $50,000 is appreciated to $100,000 and it's a long term capital gain.

And I gift that to a charity, the charity gets the full value of the deduction.

So $100,000, there's no tax due to the taxpayer for the appreciation of that.

Right.

And so if I could give them cash, or I could use that cash to replenish my portfolio because I've gifted this stock and avoided that capital gain.

Justin, I like that option.

And we do it a lot.

I think one of the big benefits compared to a QCD, you know, with a $5 million IRA, you're gonna have to do some meaningful QCDs to eat away at this future tax time bomb.

With a qualified charitable distribution, you cannot give it to a donor advised fund.

A donor advised fund is a bucket that's earmarked for charity.

So if Justin wanted to give $100,000 over the next 10 years, he could put $100,000 in the donor advised fund and deplete that account and get the, you know, get the tax deduction year one and deplete that account forgiving over the next 10 years.

Qualified charitable deductions do not work that way.

I can't put that money into a donor revised fund.

So to use an apples to apples comparison, I have to find a charity I'm comfortable with getting $100,000 free and clear on day one, I'd argue QCD is a little more powerful because it reduces taxable income.

But also, you know, there's not as much flexibility in terms of the grant to the beneficiary.

I think that's a huge distinction.

I mean, Jared, you mapped out an RMD schedule a while ago in this episode.

And Jared, the RMDs hit four, then five, then $600,000.

So if you're taking a QCD for let's say 250,000, well, man, that's a lot to give to a charity at one time.

And if you have a plan to do that, great.

Love that.

But a lot of people don't.

Yeah.

So that's why a lot of people like donor advice funds.

Let's bunch five years in one.

And then I will give at a regular giving clip to the in charity.

I will say specifically to Mark's question, should you do QCD or should you just gift a brokerage account to a donor advice fund?

A huge part of this is just your investment portfolio.

Do you have one large position with a giant gain?

Well, in that case, man, probably skip the QCD gift from the brokerage account because that's gonna fix a portfolio problem, right?

That's gonna remove the risk of the concentrated stock position.

So I think that probably makes a ton of sense.

If not, then QCDs could be the play.

So I think a huge part of this is what's your balance sheet?

One other real quick distinction, man, if it's an individual stock, was it from nua?

NUA doesn't get a step up in basis.

But if it's not from nua, then it does get a step up in basis.

So yeah, I think that's probably all I got on the topic.

One other thing that's really important is there's kind of trade offs here, right?

QCDs.

If you think about it, right.

Like if you think about avoiding taxes on capital gains, that top marginal bracket is 20% with 3.8% investment income tax.

Qualified charitable distributions.

They reduce taxable income, which is much higher brackets.

Right.

It all comes back to who is going to spend this money and when in the RMD kind of tax bomb.

To answer Mark's question directly, I think the answer is it depends.

Yeah.

Which is just tough.

But I do think some amount of both could be beneficial.

It's also like how, how different is the underlying equity from your ideal equity, right?

Like if you own like a Vanguard S&P 500 fund, is there really urgency or excitement to diversify that versus if I own ExxonMobil stock and it's 20% of my balance sheet and I own too much and I'm uncomfortable with it.

Right.

Like great point.

That would kind of drive the urgency for me.

I think those are two good things to think about.

I think one thing we didn't touch on that's like really low hanging fruit.

It depends on the construction of your balance sheet.

A lot of our families are that have accumulated this much in assets are dual income households and a lot of them both, you know, met via a super major or worked at tangential oil and gas companies.

This is across two IRAs.

It's worth having thinking through having the kids as beneficiaries on both IRAs.

Right.

Because let's say the 5 is evenly dispersed across two spouses.

If the surviving spouse inherits the whole IRA then their account grows to $5 million and then their beneficiaries inherit one IRA and have one 10 year period.

If you made the kids partial beneficiaries on one of the IRAs, assuming it's 2.5, they would get a 10 year distribution window when the first spouse dies and then the surviving spouse would still get a good healthy portion of that ira.

Maybe it's a little less.

And then when spouse number two dies, then the beneficiaries have another 10 year window.

I don't know.

Based on the question, the composition of those balance sheets and how much is in each ira.

But naming the kid as partial beneficiaries is really a surefire, like a really low hanging fruit way.

Assuming that there's substantial IRAs in both spouses names.

That's right.

But Jared, it all depends.

And we didn't even get a touch too much on the itemized deductibility of the other parts of your tax return.

Like what are your other itemized deductions and how does that influence it?

So there's a lot of moving parts.

But I think asking all of these questions, beginning to get curious about all of these topics is how you go down the rabbit hole of really having a thoughtful lifetime tax plan.

Yeah.

And just mapping out, okay, what is the future tax rate?

Because like, like when you actually do the math and realize, oh my goodness, I could have a half a million dollar RMD and be a single income filer.

That's totally going to change how you think about 24% tax bracket today.

Totally.

Especially if you're kind of accumulating.

But Mark, we appreciate you and your question.

Love to hear from our listeners and hope this is helpful.

We'll see you next time.

Thanks for listening to this episode of the podcast.

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