Understanding Donor-Advised Funds

A flexible giving strategy with real tax benefits when used intentionally

For individuals and families who are both financially successful and charitably inclined, donor-advised funds (DAFs) offer a rare combination: the ability to give back on your terms while also making a smart planning decision. These funds aren’t new or obscure. In fact, they’ve been part of the tax code for decades and are used by some of the most strategic donors in the country.

But despite their growing popularity, DAFs are still often misunderstood. What are they? How do they actually work? And in what scenarios do they make the most sense?

Let’s walk through it clearly and practically.

What Is a Donor-Advised Fund?

A donor-advised fund is a type of charitable giving account. You contribute assets to the account—whether it’s cash, stock, or other investments—and receive a tax deduction in the year you contribute. From there, you can recommend grants to qualified 501(c)(3) charities over time.

Importantly, once the assets are in the DAF, they are irrevocably committed to charitable purposes. You can’t take the money back. But you do retain control over when and where the grants are sent. That combination of upfront deduction and future flexibility is what makes DAFs such a powerful planning tool.

How a Donor-Advised Fund Works

The mechanics are straightforward:

• You contribute cash, appreciated securities, or other eligible assets to the DAF.

• You receive a tax deduction in the year of the gift, subject to IRS limits.

• The assets can be invested within the DAF for potential tax-free growth.

• You recommend grants to qualified charities on your own timeline—whether that’s in the coming months or over the next several years.

Think of it as creating your own charitable giving account. You make the decision to fund it once, then draw from it intentionally to support causes that matter to you.

Why Donating Stock Can Be Even More Tax Efficient

While DAFs accept both cash and investments, appreciated stock is often the more strategic choice. That’s because donating appreciated assets provides a double benefit:

• You avoid paying capital gains tax on the appreciated value of the stock.

• You still receive a charitable deduction for the full fair market value of the asset.

This makes DAFs especially attractive for individuals who hold long-term stock positions with significant unrealized gains. Rather than selling, paying tax, and then donating what’s left, you can donate the shares directly and let the full value go to work.

Charitable Deduction Limits and Why Timing Matters

When you contribute to a donor-advised fund, the charitable deduction happens in the year of the contribution—not when the funds are ultimately granted to a nonprofit. This is a key concept. You’re consolidating the deduction into a single year, even if your giving takes place gradually over time.

The IRS limits how much of that deduction you can take in a given year, based on your Adjusted Gross Income (AGI):

• Cash contributions to a DAF are deductible up to 60 percent of AGI

• Appreciated securities are deductible up to 30 percent of AGI

Here’s how that works in practice:

• If you have $800,000 of AGI in a high-income year, you could deduct up to $480,000 for cash gifts (60 percent of AGI).

• For appreciated securities, the deduction cap would be $240,000 (30 percent of AGI).

If your gift exceeds those limits, the unused portion can be carried forward for up to five additional years.

This timing flexibility also makes donor-advised funds especially useful in today’s tax environment. Because the standard deduction is so high—currently over $27,000 for married couples—fewer people itemize their deductions each year. A strategy known as “bunching” has become more common, where individuals group multiple years’ worth of charitable giving into a single tax year in order to surpass the standard deduction and unlock the full benefit of itemizing.

By combining that approach with a DAF, you can:

• Make a single large contribution now

• Take the deduction in the year you itemize

• Spread your actual charitable gifts over multiple years

That’s why DAFs aren’t just about giving. They’re about giving with intention and aligning your generosity with a smart tax strategy.

When a DAF Makes the Most Sense: Real-World Examples

Donor-advised funds are not one-size-fits-all, but in the right situations, they can be incredibly effective. Here are a few examples of when we’ve seen them add real value:

A High-Income Year
If you're experiencing a year with unusually high taxable income—whether from a stock option exercise, RSU vesting, a business sale, or even a large bonus—a contribution to a DAF can help offset the spike. You front-load a charitable deduction while retaining the flexibility to give over time.

Pre-Retirement Planning
In the final years of your career, income is often at its peak. This can be a smart window to make a sizable charitable contribution, securing the deduction when it’s most valuable while building a pool of funds you can use to support causes during retirement.

Managing a Concentrated Stock Position
Rather than triggering gains by selling a long-held stock position, donating shares directly to a DAF can help reduce portfolio risk, eliminate capital gains tax, and create philanthropic leverage.

Simplifying Charitable Giving
For families who give regularly, managing receipts, timing, and tax documentation can become a hassle. A DAF consolidates everything into a single deduction in the year of contribution, then lets you support multiple charities with clean recordkeeping and no year-end rush.

Final Thoughts: A Smart Tool for Thoughtful Givers

At its core, a donor-advised fund is not just a tax move—it’s a planning tool for people who genuinely want to give back but also want to do so intentionally. It provides structure, flexibility, and potential tax savings. Most importantly, it lets you align your financial decisions with your values.

Donor-advised funds are just one of many planning tools that can make a meaningful difference when used in the right context. Whether it’s tax strategy, charitable giving, or navigating a high-income year, having a coordinated financial plan ensures each decision fits into the bigger picture.

Frequently Asked Questions

What happens to the money in a DAF if I don’t distribute it right away?

The assets remain in the DAF until you recommend a grant. In the meantime, they can be invested for potential tax-free growth. There is no required timeline for making grants, but sponsors may have policies on inactivity.

Can I contribute to a DAF every year?

Yes. You can make recurring contributions, whether for consistent tax planning or as part of a long-term charitable giving strategy.

Is a DAF right for me if I live in Cincinnati or Ohio?

If you’re a high-income individual or business owner in Ohio—especially in a city like Cincinnati where concentrated stock positions and RSUs are common—a DAF can be a powerful tool. It’s particularly relevant when paired with broader strategies like tax oversight and income planning.

Do I still get a deduction when I distribute funds from the DAF?

No. The charitable deduction occurs at the time of contribution to the DAF. Distributions made later to charities do not generate an additional deduction.

How is a DAF different from giving directly to a charity?

Giving directly to a charity provides an immediate impact and deduction. A DAF offers more flexibility—you get the deduction now but can choose which charities to support and when. It also allows for anonymous giving and consolidated recordkeeping.

Disclaimer: This communication is intended for informational purposes only and should not be construed as personalized financial, investment, or tax advice. Donor-advised funds may not be suitable for all investors. Please consult with your tax and legal advisors before making any financial decisions. Advisory services offered through Vaultis Private Wealth LLC, a registered investment adviser.

What Is a Step-Up in Basis on Inherited Assets?

When a beneficiary inherits an appreciated asset—such as stock, a home, or a business interest—the IRS typically allows the cost basis of that asset to be “stepped up” to its fair market value (FMV) as of the date of the original owner’s death.

This means that any unrealized capital gains that occurred during the original owner's lifetime are effectively erased. The beneficiary's new basis is the asset’s value on the date of death, which significantly reduces taxable gains if the asset is later sold.

Step-Up in Basis Example Using Stock

Let’s say a parent purchased 1,000 shares of Apple Inc. (AAPL) at $10 per share many years ago—totaling a $10,000 cost basis. At the time of their death, the shares are worth $180 per share, or $180,000 in total.

• Original basis: $10,000

• Value at death (new basis): $180,000

• Sale by heir: $185,000

• Taxable gain: $5,000

Instead of paying capital gains tax on $175,000, the heir only owes tax on the $5,000 increase that occurred after they inherited the shares. This is the power of a properly applied step-up in basis for inherited stock.

Which Assets Receive a Step-Up in Basis?

Most taxable assets are eligible for a step-up in basis at death, including:

• Individual stocks and bonds

• Exchange-traded funds (ETFs) and mutual funds

• Real estate (primary residences, rental property, land)

• Collectibles (art, antiques, etc.)

• Interests in privately held businesses

These are commonly referred to as capital assets, and the adjustment to their basis helps reduce or eliminate capital gains tax when sold by the heir.

Assets That Do Not Receive a Step-Up in Basis

Some assets do not qualify for a step-up in basis. It’s important to understand how they are taxed differently:

• Cash and bank accounts – Do not appreciate in value, so there’s no cost basis to adjust.

• IRAs and 401(k)s – These are pre-tax retirement accounts. Distributions are taxed as ordinary income, not capital gains, and thus are not eligible for a step-up.

• Annuities – Gains are taxed as ordinary income when withdrawn.

• U.S. Savings Bonds – Accrued interest is taxable when redeemed; no step-up applies.

For inherited retirement accounts, different rules govern distributions and tax treatment. Learn more about IRA beneficiary rules here.

Key Planning Considerations for Step-Up in Basis

Understanding how step-up in basis rules interact with your estate plan can lead to more tax-efficient outcomes for your beneficiaries.

• Gifting vs. Inheriting: Appreciated assets gifted during your lifetime carry over your original basis to the recipient. If those same assets are inherited instead, the beneficiary typically receives a step-up in basis—greatly reducing potential capital gains taxes.

• Diversification Opportunity: Many investors hold onto concentrated positions—such as legacy holdings in companies like AAPL—because of the tax consequences of selling. After inheritance, however, the step-up in basis gives heirs a chance to diversify without triggering major tax liability. This allows them to realign their portfolios with long-term goals and risk tolerance.

• Community Property Rules: In community property states (like California or Texas), a surviving spouse may receive a full step-up in basis on jointly owned assets—not just their deceased spouse’s half. This can unlock significant tax benefits in joint estate planning.

• Trust Design Impacts: Assets held in certain irrevocable trusts may not receive a step-up in basis unless they are included in the taxable estate. Coordinating with both a tax advisor and estate attorney is essential when designing trusts for generational wealth transfer.

Final Thoughts

The step-up in basis is one of the most important tax planning tools available when transferring taxable assets. When used strategically, it can eliminate years—or even decades—of embedded capital gains and help heirs make better financial decisions with inherited wealth.

At Vaultis Private Wealth, we approach every client with an understanding of their unique goals, values, and financial complexities. We help implement tax-smart estate planning strategies that align with your vision—so that what you’ve built can be preserved and passed on with intention.

Frequently Asked Questions

What is a step-up in basis?

A step-up in basis increases the cost basis of an inherited asset to its fair market value on the date of death. This often reduces or eliminates capital gains taxes if the asset is sold soon after inheritance.

Does the step-up in basis apply to retirement accounts like IRAs or 401(k)s?

No. Retirement accounts such as IRAs, Roth IRAs, and 401(k)s do not receive a step-up in basis because they are taxed differently — either as ordinary income or tax-free in the case of Roth accounts.

Do jointly owned assets receive a full step-up in basis?

It depends on the state and how the assets are titled. In community property states, both halves of a jointly owned asset may receive a full step-up. In separate property or common law states, typically only the decedent’s share receives a step-up.

What happens if I sell an inherited asset shortly after receiving it?

If the asset’s value hasn’t changed much since the date of death, you’ll likely owe little to no capital gains tax due to the step-up. The gain or loss is measured against the stepped-up basis, not the original purchase price.

What documentation should I keep to support the step-up in basis?

Keep records that show the asset’s fair market value as of the date of death — such as brokerage statements, qualified appraisals, or real estate comps. This information is critical in case of an IRS inquiry or future sale.

Disclosure: This communication is for informational purposes only and should not be construed as investment, legal, or tax advice. The information provided is based on current laws and regulations, which are subject to change. Vaultis Private Wealth (“Vaultis”) is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Vaultis and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future results. All investments involve risk, including the potential loss of principal. Consult with a qualified financial, legal, or tax professional before making any decisions based on this content.

Naming a Trust as an IRA Beneficiary: What You Need to Know

Trusts are widely used in estate planning to provide control, protection, and flexibility over how assets are managed and distributed. They help ensure assets are directed according to your wishes, protect beneficiaries who may not be equipped to manage an inheritance on their own, and offer privacy and efficiency in settling your estate.

While it is more common to name individuals as IRA beneficiaries, there are specific cases where naming a trust as an IRA beneficiary may be the right choice—such as when planning for minors, beneficiaries with special needs, or coordinating more complex family or tax strategies.

However, the rules governing trusts as IRA beneficiaries are intricate and have become even more so following the SECURE Act (2019) and SECURE 2.0 (2022). If you're considering naming a trust as your IRA beneficiary, understanding the IRS required minimum distribution (RMD) rules and their tax impact is essential to avoiding unintended consequences.

Why Consider Naming a Trust as an IRA Beneficiary?

Naming a trust as the beneficiary of your IRA can give you more control over how and when retirement assets are distributed after death. For example:

• Distribute assets gradually to a young or financially inexperienced heir

• Protect a beneficiary who relies on means-tested public benefits

• Provide long-term oversight for a loved one with special needs

• Centralize planning by updating one trust document instead of multiple beneficiary forms

However, due to post-SECURE Act complexity, careful structuring is critical to avoid accelerated taxes and lost deferral opportunities. 

Understanding Beneficiary Categories Under the SECURE Act

The SECURE Act categorizes beneficiaries into three main types, each with distinct tax treatment:

1. Eligible Designated Beneficiaries (EDBs)

These individuals can stretch IRA distributions over their life expectancy:

• Surviving spouse

• Minor child of the account owner (until age 21, then 10-year rule applies)

• Disabled or chronically ill individual

• Individuals not more than 10 years younger than the account owner

2. Non-Eligible Designated Beneficiaries (Non-EDBs)

These include most adult children and grandchildren. They must withdraw the entire IRA balance within 10 years, accelerating taxable income.

3. Non-Designated Beneficiaries

Includes entities like estates or certain trusts that do not qualify as see-through. These are subject to stricter RMD schedules:

• If the owner died before their Required Beginning Date (RBD): Account must be emptied within 5 years

• If the owner died on or after their RBD: Distributions follow the owner’s remaining life expectancy

RBD Note: The Required Beginning Date is April 1 of the year after turning age 73 (or 75 if turning 74 after December 31, 2032, under SECURE 2.0).

Examples

• A 15-year-old minor child (EDB) can stretch distributions to age 21, then must fully distribute by age 31

• A 45-year-old adult child (non-EDB) must withdraw all funds within 10 years

• A non-see-through trust inheriting a $500,000 IRA must follow the 5-year rule if the owner died before RBD—leading to large annual distributions taxed at 37% federal if retained

 Trusts as IRA Beneficiaries: A Complex Framework

Trusts are subject to unique IRS rules depending on whether they qualify as see-through trusts and the status of the underlying beneficiaries.

Non-See-Through Trusts (Non-Designated Beneficiaries)

These trusts fail to meet IRS "see-through" requirements—often due to:

• Having non-individual beneficiaries

• Failing to provide documentation to the IRA custodian

• Ambiguous or noncompliant language in the trust document

Distribution rules:

• Owner died before RBD → 5-year rule

• Owner died on or after RBD → Distributions follow owner’s life expectancy

Example: A non-see-through trust inherits a $500,000 IRA in 2025. If the owner died before RBD, the account must be distributed by 2030—about $100,000 per year. If retained, income taxed at trust rates (37% federal starting at $15,200 in 2025).

See-Through Trusts (Designated Beneficiaries)

A see-through trust meets IRS criteria:

• Has identifiable individual beneficiaries

• Is valid under state law

• Provides timely documentation to the IRA custodian

This allows the IRS to look through to the underlying beneficiaries and apply EDB or non-EDB rules.

Scenarios:

• All EDBs: Life expectancy stretch allowed

• Any Non-EDB: 10-year rule applies

• Owner died after RBD: Years 1–9 require annual RMDs based on oldest beneficiary’s life expectancy

Example: A see-through trust names a 65-year-old spouse (EDB) and a 30-year-old adult child (non-EDB). The presence of a non-EDB triggers the 10-year rule—$1 million must be distributed by 2034, likely $100,000 annually.

Separate Accounting: A Key Opportunity Under Final Regulations (2024)

New IRS guidance (Final RMD Regulations, July 2024) allows separate accounting for subtrusts if:

• The trust document mandates division immediately after death

• Subtrusts receive pre-specified IRA shares (not discretionary)

Each subtrust can then follow the distribution schedule of its own beneficiary:

• EDB Subtrusts: Stretch allowed

• Non-EDB Subtrusts: 10-year rule applies

Example: A $1 million IRA is split between a spouse (EDB) and adult child (non-EDB) in 2025.

• Spouse’s subtrust: Life expectancy stretch (approx. $21,000/year initially)

• Child’s subtrust: 10-year rule ($50,000/year if evenly split)

• Each pays tax based on their own rate—potentially reducing trust-level taxation.

Strategic Tax Planning for IRA Trust Beneficiaries

If you're considering naming a trust as your IRA beneficiary, keep these planning tips in mind:

• Use separate accounting: Mandate subtrusts in your document and assign specific IRA shares

• Ensure see-through compliance: Only use identifiable individual beneficiaries and submit timely documentation

• Match structure to intent:

  • Use conduit trusts for simplicity and direct distributions to EDBs

  • Use accumulation trusts for control, but account for high trust tax rates

• Consult a qualified attorney to ensure compliance with SECURE Act and IRS regulations

• Review regularly: Update your trust after life events or regulatory changes (e.g., SECURE 2.0 RMD age shifts)

Take Action: Plan Your Trust with Precision

The SECURE Act and the 2024 IRS regulations introduced new complexities—but also new planning opportunities. If you’ve named, or are considering naming, a trust as your IRA beneficiary, now is the time to review your plan.

At Vaultis Private Wealth, we work closely with clients to ensure their estate and retirement assets are coordinated thoughtfully and tax-efficiently. From trust structure to beneficiary designation, we help you take proactive steps to protect your legacy and minimize unintended tax consequences.

Frequently Asked Questions

Can I name a trust as the beneficiary of my IRA?

Yes. A trust can be named as an IRA beneficiary, but it must meet certain IRS criteria to preserve favorable tax treatment. These are known as the “see-through” trust rules.

What is a see-through trust?

A see-through trust is one where all beneficiaries are identifiable individuals, allowing the IRA to “look through” the trust and apply distribution rules based on the underlying beneficiaries’ life expectancies or the 10-year rule under the SECURE Act.

Why would someone name a trust instead of an individual?

Trusts are often used to control how and when IRA assets are distributed — especially useful for minors, spendthrift heirs, or complex family situations. They also provide an additional layer of asset protection and control after death.

How did the SECURE Act change IRA planning with trusts?

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries, including trusts. Most trust beneficiaries must now fully distribute inherited IRA assets within 10 years, which can accelerate tax consequences.

Are there risks to naming a trust as the IRA beneficiary?

Yes. If the trust doesn’t meet IRS requirements or isn’t drafted carefully, it could trigger immediate taxation or force faster distributions. Coordination between your attorney and financial advisor is critical to avoid unintended outcomes.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or investment advice. Individual circumstances vary, and tax laws are subject to change. Please consult with a qualified financial, tax, or legal advisor before making decisions regarding your IRA or beneficiary planning.

Distribution Rules When You Inherit an IRA

With IRAs representing a significant portion of many investors’ wealth, both beneficiary planning and a clear understanding of IRA inheritance distribution rules are essential. The SECURE Act (2019) and SECURE 2.0 (2022) introduced major changes that affect how inherited IRAs are distributed—especially for non-spouse beneficiaries. Understanding these changes is critical for minimizing taxes and preserving wealth for future generations.

Why IRA Beneficiary Designations Matter

Unlike other assets, your IRA passes directly to the beneficiaries you name—regardless of what your will or trust says. That means your decisions have a direct impact on how and when heirs receive these assets—and how much may be lost to taxes. The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries, replacing it with a 10-year rule. SECURE 2.0 further changed required minimum distribution (RMD) ages and added flexibility for spouses.

The End of the Stretch IRA: A Compressed Timeline

Before 2020, most beneficiaries could stretch required minimum distributions (RMDs) over their entire life expectancy, using the IRS Single Life Table. This long-term deferral allowed younger beneficiaries to minimize annual tax burdens and maximize the IRA’s compounding potential.

The SECURE Act replaced this option for most non-spouse beneficiaries with a 10-year withdrawal rule. Now, the account must be emptied within 10 years—often increasing the beneficiary’s taxable income during peak earning years.

Example: A 45-year-old inheriting a $1 million IRA in 2025 must now withdraw the full balance by 2035. Even if spread evenly, that’s ~$100,000/year—versus $24,400/year under the former stretch rules. This change significantly compresses tax deferral and may push the heir into a higher tax bracket.

Understanding Beneficiary Categories

The distribution rules depend on the type of beneficiary. The SECURE Act defines three main categories:

Eligible Designated Beneficiaries (EDBs)

These individuals can still stretch distributions over their life expectancy:

• Surviving spouses – May roll the IRA into their own, delay RMDs until age 73, or use the deceased’s schedule

• Minor children of the account owner – Stretch allowed until age 21, then 10-year rule applies

• Disabled or chronically ill individuals – Stretch permitted with proper documentation

• Individuals less than 10 years younger than the owner – Often siblings or close-in-age partners

Example: A 15-year-old inheriting an IRA can take distributions based on life expectancy until age 21, then must withdraw the remainder within the following 10 years.

Non-Eligible Designated Beneficiaries (Non-EDBs)

Most adult children, grandchildren, or unrelated individuals fall into this group. They must follow the 10-year rule, with specific requirements based on the IRA owner’s Required Beginning Date (RBD):

• RBD: April 1 of the year following the year the IRA owner reaches age 73 (for individuals born between 1951 and 1959) or age 75 (for those born in 1960 or later), as stipulated by SECURE 2.0.

If the owner died before RBD:

• No annual RMDs are required

• Beneficiary can withdraw any amount any year, as long as the IRA is fully distributed by the end of year 10

• Greater flexibility for tax planning

If the owner died on or after RBD:

• Annual RMDs are required for years 1–9, based on the beneficiary’s life expectancy

• Full distribution still required by the end of year 10

• IRS waived penalties for missed RMDs between 2021–2024 due to confusion

• Beginning in 2025, failing to take required minimum distributions (RMDs) may result in a 25% excise tax on the missed amount. However, if the oversight is corrected within two years, the penalty may be reduced to 10%, as outlined in SECURE 2.0.

Example: A 50-year-old inheriting an IRA from a parent who died after age 73 must take annual RMDs for 9 years and distribute the entire account by year 10. Strategic withdrawals—like taking more in lower-income years—can reduce overall tax impact.

Trusts as IRA Beneficiaries: Control Comes with Complexity

Trusts can provide valuable control and protection for beneficiaries, but they come with more complex tax treatment:

• Most trusts must follow the 10-year rule, unless structured as a see-through trust with qualified individual beneficiaries

• Non-see-through trusts are subject to even stricter rules

• For best results, work with an advisor to ensure the trust meets IRS requirements and aligns with your planning goals

Strategic Tax Planning for Inherited IRAs

If you’ve inherited an IRA—or are planning your legacy—consider these strategies:

• Time withdrawals strategically: Withdraw more in lower-income years to reduce total taxes

• Maximize spousal rollover options: Spouses can often delay or reduce taxable distributions

• Review designations regularly: Update beneficiaries after life events or tax law changes

• Coordinate with trusts: Ensure language is SECURE Act-compliant if using trusts as beneficiaries

Take Action: Plan for the Future, Avoid Surprises

The most important step you can take today is to review your IRA beneficiary designations. This simple task is often overlooked—but critical to ensuring your wealth is transferred in a tax-efficient, intentional way.

The shift from the stretch IRA to the 10-year rule has major tax implications. IRA owners must regularly review and update beneficiary designations. Beneficiaries must understand their distribution rules to avoid penalties and missed opportunities.

If you’re an IRA owner, take time to ensure your beneficiary choices reflect your goals and family structure. If you’re inheriting an IRA, know your category and obligations under current law. Staying informed and working with a qualified advisor can help protect your wealth—and your legacy.

Frequently Asked Questions

What are the current rules for inherited IRA distributions?

Most non-spouse beneficiaries must fully distribute the inherited IRA within 10 years of the original owner’s death, due to changes introduced by the SECURE Act. Required minimum distributions (RMDs) may still apply within those 10 years, depending on the beneficiary type.

Do spouses follow the same 10-year rule for inherited IRAs?

No. A surviving spouse can treat an inherited IRA as their own, which typically allows for more flexible distribution options and may delay RMDs until age 73.

What happens if the original IRA owner was already taking RMDs?

If the IRA owner passed away after beginning RMDs, the non-spouse beneficiary may be required to continue those distributions annually within the 10-year window, depending on their relationship to the decedent.

Are trusts subject to the same 10-year distribution rule?

Generally yes. Most trusts that inherit IRAs are now subject to the 10-year rule. However, certain types of trusts — like “eligible designated beneficiary” (EDB) trusts for disabled or chronically ill individuals — may still qualify for stretch treatment.

What are the penalties for missing required IRA distributions?

Missing a required distribution can trigger a penalty of 25% of the amount that should have been withdrawn. Working with a financial advisor can help ensure compliance and avoid costly mistakes.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or investment advice. Individual circumstances vary, and tax laws are subject to change. Please consult with a qualified financial, tax, or legal advisor before making decisions regarding your IRA or beneficiary planning.

Backdoor Roth Contributions: A Guide for High-Income Earners

For high-income individuals who exceed Roth IRA contribution limits, the Backdoor Roth IRA contribution is a powerful strategy to maximize tax-free retirement savings. This approach allows you to benefit from the advantages of a Roth IRA, even if your income is too high to contribute directly.

 Traditional IRA vs. Roth IRA

A Traditional IRA and a Roth IRA both help you save for retirement, but they work differently:

• Traditional IRA:

  • You may be able to deduct your contributions from your taxable income, lowering your tax bill for the year you contribute.

  • Your money grows tax-free, but you pay ordinary income tax when you eventually take distributions in retirement.

• Roth IRA:

  • Funded with after-tax dollars, so you don’t get a tax deduction up front.

  • Your money grows tax-free and you can withdraw it tax-free in retirement.

  • If your income is too high, you can’t contribute directly to a Roth IRA.

 Contribution and Income Limits

• Traditional IRA: Anyone with earned income can contribute, but whether you can deduct the contribution depends on your income and if you have a workplace retirement plan.

• Roth IRA: Direct contributions are not allowed if your income is above certain limits (for 2025, $150,000 for single filers and $236,000 for married couples).

Deductible vs. Non-Deductible IRA Contributions

A deductible contribution means you can subtract the amount you contribute from your taxable income, lowering your tax bill for the year. A non-deductible contribution is made with after-tax dollars—you don’t get a tax break now, but you can still grow your retirement savings. The key to the Backdoor Roth is making a non-deductible (after-tax) contribution to a Traditional IRA, which sets the stage for a tax-free Roth conversion.

 What Is a Roth Conversion?

A Roth conversion is when you move money from a Traditional IRA to a Roth IRA. There is no income limit to make a Roth conversion, making it an accessible option for high-income earners. Normally, this is a taxable event—you pay taxes on any pre-tax money you convert. But if you only convert the after-tax (non-deductible) contribution, you won’t owe taxes on the conversion, because you’ve already paid taxes on that money.

 Important Considerations

To ensure a seamless Backdoor Roth contribution, it’s essential to understand potential tax implications. If you have other pre-tax IRA balances, the IRS applies the pro-rata rule, meaning a portion of your conversion may be taxable based on the ratio of pre-tax to after-tax funds across all your IRAs. For example, suppose you have $50,000 in pre-tax IRA funds and contribute $7,000 non-deductible, totaling $57,000 in your IRAs. If you convert the $7,000 to a Roth IRA, the pro-rata rule determines the taxable portion: $50,000 (pre-tax) ÷ $57,000 (total IRA balance) = 87.72% of the conversion is taxable. To avoid this, you can roll old IRAs into a 401(k), which may take a few weeks, so plan ahead. Additionally, ensure accurate reporting on Form 8606 to avoid potential IRS penalties. Cleaning up these accounts helps ensure a tax-free conversion and maximizes the benefits of your Backdoor Roth.

 Step-by-Step: How to Make a Backdoor Roth Contribution

• Make a non-deductible contribution to a Traditional IRA (up to $7,000 for 2025, or $8,000 if age 50+). This can be done for the current year or prior year (if done prior to the tax filing deadline).

• Convert the amount to a Roth IRA, ideally within days to avoid taxable earnings. Even small investment gains in the Traditional IRA before conversion are taxable, so acting promptly simplifies the process and avoids unexpected tax bills.

• Report the non-deductible contribution and conversion on IRS Form 8606 when you file your taxes.

The Power of Tax-Free Growth

As a simple example, if you contribute $7,000 a year for 25 years and earn an average 8% return, you could accumulate over $513,000—all tax-free in retirement. In a taxable account, the same $7,000 annual investment at 8% could lose 20-30% to taxes on capital gains, dividends, and interest throughout the 25 years, including when you access the funds, reducing your final balance significantly. This analysis does not account for future increases in contribution limits.

 Roth IRA Distribution Rules

Once you’ve built your Roth IRA through the Backdoor strategy, understanding how to access your funds tax-free is important. The following rules apply:

• You can withdraw your contributions at any time, tax- and penalty-free.

• Earnings can be withdrawn tax-free after age 59½, provided your first Roth IRA contribution or conversion was made at least five years earlier (the five-year clock starts January 1 of the year of your first contribution or conversion).

• No required minimum distributions during your lifetime.

The Backdoor Roth is a strategic tool for high-income earners looking to secure a source of tax-free growth for retirement. By leveraging this approach, you can build a substantial Roth IRA bucket—potentially worth hundreds of thousands of dollars, as illustrated—that offers flexibility and tax advantages in your later years. Integrating this strategy into a comprehensive financial plan can enhance your long-term wealth-building efforts, especially when paired with other tax-efficient solutions.

Disclosure:

This article is for informational purposes only and should not be considered tax, legal, or investment advice. Individual circumstances vary, and strategies discussed may not be suitable for all investors. Before implementing any financial strategy, including the Backdoor Roth IRA, consult with a qualified tax advisor or financial professional to ensure it aligns with your overall financial plan and current tax laws. Vaultis Private Wealth does not provide tax or legal advice. All examples are hypothetical and for illustrative purposes only. Past performance is not indicative of future results.

The Importance of Saving Outside Your Retirement Plan

When planning for retirement, many prioritize maxing out their 401(k) or IRA. These accounts offer tax advantages and often an employer match, making them a cornerstone of retirement savings. However, an often-overlooked aspect of financial planning is the value of diversifying the types of accounts you save into. At Vaultis Private Wealth, we frequently encounter clients with substantial 401(k) or IRA balances but limited savings elsewhere. This can restrict their ability to craft a tax-efficient Lifestyle Distribution Strategy in retirement. By spreading savings across taxable brokerage accounts, Roth IRAs, and traditional retirement plans, you gain flexibility to minimize taxes and optimize your retirement income.

The Power of 401(k) Savings

Saving through a 401(k) is straightforward. You choose a percentage of your paycheck to contribute, up to $23,500 in 2025 (or $31,000 if you’re 50 or older, or $34,750 if you’re aged 60 to 63, thanks to the SECURE 2.0 Act’s higher catch-up contribution rules), and deductions happen automatically. Many employers offer a match, boosting your savings effortlessly. This consistent, behind-the-scenes approach allows individuals to build significant retirement nest eggs over time. However, relying solely on a 401(k) can limit your options when transitioning from earning a paycheck to funding your retirement lifestyle.

Why Diversify Account Types?

Diversifying account types creates options to minimize taxes and optimize your Lifestyle Distribution Strategy in retirement. Each account type has unique tax implications and access rules, which can be combined strategically to meet your cash flow needs. Consider these key accounts and their roles in a diversified plan:

• Traditional 401(k)s and IRAs
  Distributions from these accounts are taxed as ordinary income, with marginal 2025 rates for married couples filing jointly ranging from 10% to 37% (for example, 22% for income between $96,951 and $206,700, or 24% for income between $206,701 and $394,600, with the top 37% rate applying to incomes over $751,600). Additionally, Required Minimum Distributions (RMDs) begin at age 73, requiring withdrawals of approximately 4% of your account balance annually, based on the prior year’s December 31 value. These withdrawals can push you into higher tax brackets, particularly if RMDs exceed your spending needs.

• Taxable Accounts
  Taxable accounts provide unparalleled flexibility, with no age restrictions on accessing funds. You pay taxes annually on dividends, interest, and realized capital gains, but these are often taxed at preferential rates: qualified dividends and long-term capital gains face 0%, 15%, or 20% rates, depending on your income (for example, 15% for married couples with taxable income between $96,951 and $583,750 in 2025). You can also access your principal (basis) tax-free. For instance, to generate $40,000 from a taxable account, you might have $10,000 in dividends taxed at 15% and sell investments for $30,000 with a $20,000 basis, resulting in only $10,000 of taxable long-term capital gains.

• Roth IRAs
  Roth IRAs stand out for their tax-free growth and distributions, provided you meet two conditions: you’re at least 59½, and the account has been open for five years. Unlike taxable accounts, you avoid annual taxes on earnings, and unlike traditional IRAs, there are no RMDs. Contributions in 2025 are limited to $7,000 (or $8,000 if 50 or older), subject to income limits. Because Roth IRAs grow tax-free, it’s often strategic to preserve these funds for later in retirement or for years when your tax bracket is high, using them to supplement income without increasing taxable income.

Crafting a Tax-Efficient Lifestyle Distribution Strategy

In retirement, your focus shifts from saving to generating income to support your lifestyle. A Lifestyle Distribution Strategy involves combining income sources, such as Social Security, pensions, rental income, or part-time work, with withdrawals from your investment accounts. The goal is to meet your cash flow needs tax-efficiently while minimizing your overall tax burden.

To illustrate the power of diversification of account types, consider a common retirement scenario. Imagine you need $100,000 to supplement your Social Security and pension income. If you withdraw this entirely from a 401(k) or IRA, the full amount is taxed as ordinary income, potentially pushing you into a higher tax bracket, such as 22% or 24%. Now consider a diversified approach: $40,000 from an IRA (taxed as ordinary income), $40,000 from a taxable account (with, say, $10,000 in dividends and $10,000 in capital gains taxed at preferential rates, typically 15%), and $20,000 tax-free from a Roth IRA. This strategy reduces your taxable income by blending income sources with different tax treatments, keeping you in a lower bracket and minimizing your overall tax burden compared to the IRA-only approach. This flexibility becomes even more critical when considering mandatory withdrawals.

RMDs add another layer of complexity. If your 401(k) or IRA is your only significant account, large RMDs could force withdrawals beyond your needs, reducing your ability to control your tax bracket. A diversified portfolio allows you to draw from taxable accounts or Roth IRAs in years when RMDs inflate your income, preserving tax efficiency.

Building a Diversified Savings Plan

To achieve flexibility in retirement, diversify your savings now. Continue contributing to your 401(k) to capture any employer match, up to the $24,000 limit (or $32,000 if 50+). Also prioritize:

• Taxable accounts for their accessibility and favorable tax treatment on capital gains and dividends.

• Roth IRAs for tax-free growth, through direct contributions ($7,000 or $8,000 if 50+) or Roth conversions from traditional IRAs, strategically timed with your advisor to manage tax implications.

By diversifying your savings, you create a robust framework for retirement. You’ll have the flexibility to navigate tax brackets, RMDs, and unexpected expenses while optimizing your income. At Vaultis Private Wealth, we view retirement planning as a strategic process of aligning your unique mix of assets with your lifestyle goals. Spreading savings across account types isn’t just about saving more—it’s about saving smarter to minimize taxes and maximize your retirement freedom.

Disclaimer

This article is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security or financial product. The information presented is general in nature and does not take into account your specific financial situation, objectives, or needs. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal. Tax laws and regulations are subject to change and may vary based on individual circumstances. Please consult a qualified financial advisor or tax professional before making any investment or financial planning decisions. Vaultis Private Wealth is not responsible for any actions taken based on the information in this article.

529 Plans: A Guide to Education Savings

As the cost of education continues to rise

Many families are looking for effective ways to save for their children’s future. One popular option is the 529 plan—a tax-advantaged savings vehicle designed specifically for education expenses. In this guide, we’ll explore how 529 plans work, strategies to maximize their benefits, and how local families across Ohio can make the most of them.

What is a 529 Plan?

A 529 plan is a state-sponsored investment account that allows families to save for education expenses with tax advantages. Named after Section 529 of the Internal Revenue Code, it's designed to encourage saving for future education costs. An account owner—typically a parent or grandparent—opens the account on behalf of a beneficiary (the future student).

Key Features of 529 Plans

• Tax Advantages: Earnings grow tax-free, and withdrawals for qualified education expenses are tax-free at the federal level. Many states, including Ohio, offer additional tax benefits.

• Flexibility: Covers tuition, fees, books, supplies, room/board, and—since 2018—up to $10,000 annually for K–12 tuition.

• Control: The account owner retains control, including the ability to change the beneficiary.

Contribution Rules

• No Income Restrictions: Anyone can contribute, regardless of income.

• Gift Tax Considerations: In 2025, contributions up to $19,000 per beneficiary are exempt from gift tax reporting.

• Superfunding Option: Front-load contributions—up to five years’ worth (e.g., $95,000 single, $190,000 married) with a gift tax election—without penalty.

Distribution Rules

• Qualified Use: Withdrawals are tax- and penalty-free when used for tuition, fees, books, room/board, computer equipment/internet, K–12 tuition, registered apprenticeship program costs, or up to $10,000 in student loan repayment.

• Non‑Qualified Use: Earnings are subject to income tax and a 10% penalty, with exceptions such as death, disability, scholarships, or military academy attendance.

Funding Strategies

• Front‑Loading: Use lump sums—bonuses, inheritances, or stock option proceeds—to boost growth in tax-advantaged accounts.

• Automatic Contributions: Regular bank or payroll transfers make saving habitual. Even modest amounts can accumulate significantly.

• Timing Matters: Starting early gives your savings more time to compound, but it's never too late. Even funding in high school years can help cover later tuition, books, or qualify for state tax deductions.

Investment Options

• Age‑Based Portfolios: Automatically adjust allocation over time.

• Static Portfolios: Maintain a steady mix.

• Individual Funds: Build a custom allocation using mutual funds.

Additional Flexibility

• Who Can Contribute: Parents, grandparents, relatives, and friends can all add to the account—a great way for family to collaborate.

• Changing Beneficiaries: Unused funds can be reassigned to another family member without penalty.

• Roth IRA Conversion Option: Starting in 2024, unused 529 funds can be converted to a Roth IRA for the beneficiary:

  • Up to $35,000 lifetime

  • Subject to annual IRA limits (e.g., $7,000 for 2024/2025)

  • Account must be open for at least 15 years

  • Funds converted must have remained in the account for at least five years

This option gives families a smart way to repurpose leftover education funds into retirement savings and reduces the risk of overfunding.

State-Specific Notes: Ohio Tax Deduction

Ohio residents benefit from a state tax deduction of up to $4,000 per beneficiary, per year, with unlimited carryforward—even if you contribute more than that amount. Contributions to any 529 plan (Ohio's or another state’s) are eligible for the deduction. Excess contributions carry forward until fully deducted.

How Vaultis Can Help

At Vaultis, we help families integrate 529 plans into their broader financial strategy—from deciding how much to fund and when, to coordinating investment choices and tax considerations. We offer independent guidance with transparent fees and can factor education funding into the bigger picture.

Putting It All Together

529 plans offer families a flexible, tax-efficient way to save for education. By combining smart funding strategies like front‑loading and auto‑contributions, leveraging state tax benefits, and working with a trusted advisor, you can optimize savings for your child’s future.

Frequently Asked Questions

What expenses qualify under a 529 plan?

Qualified expenses include tuition, fees, books, supplies, room and board (for half-time students), K–12 tuition (up to $10,000/year), computers/internet, registered apprenticeship programs, and up to $10,000 in student loan repayment.

Can I use 529 plan funds to pay for private school tuition?

Yes. You can use up to $10,000 per year, per student, for K–12 tuition at public, private, or religious elementary and secondary schools.

What happens if my child doesn’t go to college?

You can change the beneficiary to another qualifying family member, use the funds for apprenticeship programs or K–12 tuition, or convert up to $35,000 to a Roth IRA (subject to eligibility). Non-qualified withdrawals are subject to taxes and a 10% penalty on earnings.

What happens if I take a 529 distribution for non-education expenses?

If you use 529 funds for something other than qualified education expenses, the earnings portion of the withdrawal is subject to ordinary income tax and a 10% penalty. The original contributions (your basis) are always withdrawn tax- and penalty-free. There are exceptions to the penalty for cases like death, disability, scholarships, or attendance at a U.S. military academy.

Do 529 plans impact financial aid?

Yes, but usually not significantly. For parent-owned 529 plans, assets are considered a parental asset on the FAFSA and assessed at a maximum of 5.64%—less than student assets. Qualified withdrawals are not treated as income for FAFSA purposes.

Should I open one 529 account or separate accounts for each child?

Separate accounts can help track balances and investment strategy by child. However, you can also use one account and change the beneficiary later if flexibility is more important.

How does superfunding impact estate planning?

Front-loading gifts accelerates wealth transfer without affecting gift tax thresholds and frees up estate value. Vaultis coordinates these strategies alongside long-term financial goals.

How often should I revisit my 529 plan?

At least annually—or after major life changes (new child, scholarship, inheritance)—to review asset allocations, gifting levels, tax deductions, and Roth IRA rollover opportunities. Vaultis clients receive regular reviews to stay aligned with their goals.

Disclosure: The information provided in this article is for general informational purposes only and should not be considered as personalized financial advice. This content does not take into account your individual circumstances, objectives, or needs. While we strive to provide accurate and up-to-date information, tax laws and regulations are subject to change, and specific details of 529 plans may vary by state. Before making any financial decisions or implementing strategies discussed in this article, we strongly recommend consulting with a qualified financial advisor, tax professional, or legal counsel. They can provide personalized advice based on your specific situation and help ensure compliance with current laws and regulations. The author and publisher of this article are not responsible for any actions taken based on the information provided herein. Investment involves risk, and past performance is not indicative of future results. Please carefully consider your financial situation, risk tolerance, and goals before making any investment or financial decisions.