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Roth IRA Conversions
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Charitable Gifts Can Smooth the Path to Roth IRA Conversions

Effective January 1, 2019, anyone with a traditional IRA became eligible to convert part or all of the account to a tax-free Roth IRA. The fly in the ointment is that funds transferred from regular IRAs into Roth IRAs are treated as taxable income.

The decision to convert to a Roth IRA hinges on a wide variety of factors, such as a person’s current and projected income tax rates, age, capability of paying the conversion tax (without using IRA money) and ability to let the Roth account grow undisturbed as long as possible. It’s important that you consult with your professional advisers, who may suggest a strategy of increasing your itemized deductions in the year of conversion.

Friends who support the American Red Cross Bay Area Chapter might find the timing right for important gifts that can be deducted against the taxable income created by a Roth IRA conversion. For example, IRA owners could bunch several years’ worth of annual contributions into one large gift. Suppose you contribute $5,000 to the Red Cross every year. In the year of your Roth IRA conversion, you could make five years’ worth of gifts ($25,000) all at once, possibly using appreciated securities, and thereby reduce your conversion tax. Or you might accelerate a gift you had planned to make through your will into a lifetime contribution.

Charitable gift annuities and charitable remainder trusts can also provide large deductions, plus lifetime income and additional flexibility in one’s tax and financial planning. People planning to convert very large IRAs might consider establishing a grantor charitable lead annuity trust that makes payments for a fixed time period to the Red Cross, then returns all trust assets to the donor or the donor’s family.

One particularly appealing gift vehicle for creating large deductions is the deferred payment charitable gift annuity. For example, if you are 60 and would like to convert $25,000 from your traditional IRA into a Roth IRA, you will be taxable on that $25,000 – unless you can somehow come up with additional itemized deductions.

You might decide to transfer $60,000 from your money market account for a deferred payment charitable gift annuity. The gift annuity would begin paying you $5,160 (8.6% annuity rate) at age 70, but you also receive an immediate income tax deduction of about $25,000 that virtually erases the Roth IRA conversion tax. After five years, all withdrawals from your Roth IRA will be tax exempt, and a portion of your future charitable gift annuity payments will be tax-free as well. Your charitable gift annuity agreement can contain an option to start payments before age 70, at reduced levels.

The most important ingredient in all these strategies is a desire to support the humanitarian programs of the American Red Cross Bay Area Chapter. 

How do I get started?
A great place to start is to give us a call and let us know you are interested in making a gift from your IRA.  For more information, please contact Bill Ruettinger at RuettingerW@usa.redcross.org, (415) 427-8989.

Before making a gift to the American Red Cross Bay Area Chapter of a retirement plan asset, we recommend that you consult your tax advisor or attorney for full advice on the effect of your gift.

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