To Convert or Not to Convert Your IRA: A Charitable Question


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September 2015

Possibly you have a traditional IRA, and you have been wondering whether you should convert some or all of it to a Roth IRA. If you decide to convert and you have been considering a major charitable gift, a good strategy would be to do both in the same year.

You may be considering converting because you are attracted to the advantages of the Roth: tax-free distributions to you and your heirs and no required minimum withdrawals. However, you may hesitate because the money transferred from a traditional IRA to a Roth IRA will be fully taxable.

In some cases it is better to pay tax now and receive money tax-free in the future, but in other cases continuing the traditional IRA may be the better course. In general, a conversion makes sense for those who have a longer time horizon and who expect their future tax bracket to be as high as or higher than their current one. You will want to consult your financial advisor as to whether a conversion is right for you.

Let’s say you have been considering a major charitable gift for a capital campaign or to establish a named endowment. If you make your gift in the same year as the IRA switch, the deduction can offset some or all of the tax on the conversion.

Example: Joan has been planning a $100,000 gift to support our organization and is interested in a Roth conversion. She contributes $100,000 to us and in the same year transfers $100,000 from her traditional IRA to a Roth IRA. Assuming she can deduct the entire $100,000, she will pay no more tax than usual.

Suppose Joan owns a rental house she has been planning to sell but would owe considerable tax on the gain. She might transfer the house to a charitable remainder trust that would pay her income and generate a charitable deduction. The deduction could be used to offset the tax on a Roth conversion.

The results would be future tax-free income from the Roth and reduction or elimination of tax on the conversion sold.

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