Convert your IRA to a Roth IRA TAX FREE using Charitable Gifts
IRAs are great for accumulating retirement funds and rolling over 401(k)s on a tax deferred basis. Deferred is the operative word here. Ultimately, either you or your heirs will pay income tax on the entire balance. Income taxes could easily eat up 40% of your Required Minimum Distributions (RMDs). Your heirs could owe even more – as much as 70% of your IRA between income and estate taxes!
On the other hand, Roth IRAs are income tax free. Your heirs may still owe estate tax, but no compounding of income and estate taxes. Anyone can convert an IRA to a Roth IRA- but, you have to pay income taxes on the IRA, which discourages most of us from doing so.
But, what if you could convert your IRA to a Roth IRA and pay ZERO income tax? Yes, I said zero – nada, none! Before I tell you how, let’s look a little farther at the advantages of Roth versus Traditional IRA:
I’ll take a Roth IRA over a regular IRA any day of the year!
Here is the plan. You have $400,000 in an IRA, and you also have $400,000 in non-qualified assets, some of which may have substantial appreciation. You also give $20,000 per year away. What if you decided to bunch your contributions up front for a few years to gain some tax advantages?
Gift $100,000 of appreciated assets each year, creating an income tax deduction and avoiding capital gains tax. In the same year, convert $100,000 of your IRA balance to a Roth IRA, creating a taxable event. Your charitable contribution offsets the tax due on the conversion! In four years or so, you have converted all of your IRA to a Roth IRA!
Now you have a tax free pool of money in your Roth IRA worth $400,000 and growing. At 70.5, you are not required to take distributions, but if you do, they are tax free.
Not only that, but if you gift your appreciated asset to a donor advised fund, you have a tax free pool of money from which to make your charitable contributions every year. This reduces your cash flow needs, taking pressure off other assets to generate income.
If you run the numbers, you might just find this to be an awesome financial strategy for your chartable clients.
Published October 24, 2019