Quazi Roth Account Using Charitable Contributions

For those charitably inclined, most clients are donating cash. What if there was a way to donate appreciated securities instead? Effectively turning your taxable investment account into a quazi roth account. Well, there it is! Let’s look at the two scenarios below:

Scenario #1

Let’s say you donate $50k a year in cash. You will get an itemized deduction for the $50k. You also have a taxable investment account that has $250k of which you have $125k invested (tax basis) into that account. In other words, if you were to sell those assets you would have a $125k taxable capital gain.

Scenario #2

Instead of Donating cash each year, you donate $50k of appreciated stock to a Donor Advised Fund (DAF) and invest the $50k in cash you normally would have given as your charitable contribution back into your taxable investment account. The donor advised fund then sell the assets to convert over to cash and you then make the $50k charitable contribution directly from the DAF. In this scenario, you still get the $50k itemized deduction for the securities donated to the DAF which is same as the cash donation. We then take the $50k of cash and invest it into our taxable account.  If the basis in the securities donated was $25k (50% of the value as in scenario #1). What we are left with in our taxable investment account is still $250k but we now have a tax basis of $150k. So if we were to sell those securities today we would only have a $100k taxable capital gain.

Final Thoughts

Over time, this strategy would significantly increase the basis in your taxable account which gives you the ability to access those funds easier later in life with less tax consequences, truly turning it into a Quazi Roth Account!

Combine this strategy with Tax Loss Harvesting and your taxable investment account can really start working for you!