Do the “Roth Charity Offset”!

By Alison O’Carroll, director and philanthropic counsel

Many people, anticipating higher income or estate tax rates in the future, are considering converting their traditional IRAs to tax-free Roth IRAs. Such a conversion changes a taxable retirement asset into a non-taxable retirement asset, paying upfront tax at the lower tax rate. Another benefit is that a Roth IRA has no required minimum distributions (RMDs) so all funds can remain invested and continue growing tax-free.

The downside is the tax bill due in the year of the conversion. To reduce the size of the check to the IRS, consider a charitable gift – the charitable deduction can offset some or all of the increased income from the conversion. This will reduce or eliminate the income tax otherwise due on the Roth IRA conversion.

To maximize tax savings in the year of the conversion, the gift might need to be more than you usually give away in a year. With a gift to your donor advised fund, that is no problem as you can make your charitable grants from it over time.  Essentially, you are “bunching” your giving and thereby maximizing your tax savings, while keeping to your own giving schedule.

If you are considering the benefits of a Roth IRA conversion, being strategic about an offsetting charitable gift might be just the right dance move. To learn more details and how it might work in your particular situation, please contact Alison O’Carroll, director and philanthropic counsel, at 404.333.0421 or aocarroll@cfgreateratlanta.org.

This information is meant for general purposes and should not be considered legal accounting or other professional advice. Please consult with your professional advisor before taking any actions.