IRA – Roth Conversion and Charitable Giving
Since Roth IRA’s were initiated in 1998, upper-income individuals have been unable to fully take advantage of the Roth’s ability to earn income tax-free. 2010 provides an opportunity for individuals with incomes over $100,000 to convert their traditional IRA to a Roth IRA. Of course, the ability to convert brings with it a downside: not only are taxes due on the funds withdrawn from the IRA, the funds are also added to one’s annual income, and can put some into a higher tax bracket.
Converting a traditional IRA to a Roth is a good idea for many, but the tax hit can be severe. The tax hit is made worse when one is bumped into a higher tax bracket; why make the conversion if you’re going to pay a huge tax bill as a result? Wasn’t the whole idea behind setting up and IRA in the first place to take a tax deduction today, when your tax rate is high, and withdraw the funds at retirement, when your tax rate would be lower?
Charitable Giving Offset
One way that individuals can avoid being bumped into a higher tax bracket by converting their traditional IRA to a Roth is through charitable giving. Gifts can be deducted from income; generally, deductions are allowed up to 30% of Adjusted Gross Income for gifts of appreciable securities; 50% for cash donations. Any income increase caused by converting traditional IRA funds is offset by the amount of the charitable contribution.
Donations can be made to any charity recognized by the IRS. For those who need to make a large donation but can’t decide where to donate the money, a charitable gift account can be set up with a donor-advised fund provider. Contributing to such a fund enables you to receive an immediate tax deduction but take your time deciding which charity gets the money.
Donations not only benefit the charity, but the donor is able to:
- Convert more IRA funds to a Roth IRA while reducing the tax cost of the conversion
- Benefit from the potential future tax-free growth of a Roth IRA
- Support charitable causes
As with any tax-planning strategy, there could be additional considerations that apply to your particular situation. Always consult with your tax advisor, so that your over-all personal goals are taken into consideration.
2010 is the year to act. Tax laws continue to change, and are once again under review by Congress and the Obama administration. Those who have been considering making the change to a Roth are advised to consult with their tax advisor soon.


