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New Roth IRAs Rules and Charitable Giving – Opportunities?

By Jonathan Gudema Esq. on April 15, 2010One Comment

The fundraising world has to take notice when new laws impact trillions (yes, trillions) of dollars of the savings of potential donors.

This is exactly the situation with the new 2010 Roth IRA Conversion rules.

Taking a step back, Roth IRAs are one of the few opportunities for individuals in the U.S. to save without incurring taxes on investment income, which you can also withdraw without future taxes if you wait long enough (generally beyond age 59 ½ or a qualified first time homebuyer).  For those who are forward thinking, the Roth IRA is a tremendous opportunity for compound, tax free growth for yourself, your spouse or your heirs.

There are a few caveats, of course. 

Firstly, the annual contributions limits are relatively low and have not been open to higher income levels.  Contributions to Roth IRAs are only up to $5,000 a year ($6,000 for those age 50 and older) – and these limits phase out for those with income levels over $105,000.

Secondly, there are no immediate tax incentives for contributing to a Roth.  Traditional IRAs, for example, provide individuals with a very significant tax break for making contributions – one of the reasons why IRAs blossomed so quickly since their inception in the early 1980s.

So how do individuals build significant Roth IRA account balances to create a pot of tax-free gold for themselves or their families?

The answer has been Conversions.  The rules up until 2010 allowed individuals under certain income limits to convert their entire IRA funds into Roth IRA accounts.  Yet, why didn’t you rush to do this?  Taxes – you must pay 100% income tax on all funds converted into Roth IRAs from traditional IRAs – a steep price for many.

Even more important than the tax bite has been income limits on Roth IRA conversions.  Individuals with over $100,000 in adjusted gross income have been barred from making Roth IRA conversions.

In other words, the overwhelming amount of trillions of traditional IRA/retirement plan monies held by wealthier individuals has been completely prevented from taking advantage of the planning opportunities that Roth IRAs offer.

Until now.

Starting in 2010, any income level may now convert any amount of traditional IRA funds into Roth IRA accounts.  Other qualified retirement plans like 401(k)s might also allow a conversion to a Roth IRA depending on your plan.

To boot, you won’t need to pay the taxes in 2010 either.  The new rules allow Roth IRA converters to pay tax on half of the income in 2011 and half in 2012.  Converters in years after 2010 will not get this benefit – all converted amounts in 2011 and beyond will show up on your annual tax return for the year of the conversion.

Where do charities and fundraisers fit in?

To be truthful, Roth IRAs themselves have the least charitable potential of any of one’s assets.  In fact, it would be bad advice to encourage your donors to name a charity as a beneficiary of a Roth IRA.  Why?  Charities are already tax-exempt entities.  You, your spouse and/or your children are not.  Naming a charity as a traditional IRA beneficiary saves taxes; doing it for a Roth IRA blows an opportunity to provide tax free growth to those who would otherwise pay taxes on investments.

So, for future years, fundraisers need to understand that Roth IRAs are not to be designated to charities; they are for family.

But, in 2010 through 2012, there may be a very significant number of wealthier individuals who will take advantage of this new law.  And, those people will be straddled with potentially large amounts of extra taxable income – particularly in 2011 and 2012.

This is where charitable giving comes into play.

An individual in the middle of a 5-year campaign pledge – why not accelerate those gifts into 2011 and 2012 to offset these two high income years?

An individual already planning to leave a bequest to a charity – why not create a life income gift plan (gift annuity or charitable remainder trust) in 2011 or 2012 to offset the extra taxable income in those years while maintaining needed income?

An individual with a paid up insurance policy (with cash value and no loans) which is not needed anymore for family needs – why not transfer ownership of the policy to a charity in 2011 or 2012 and receive a tax deduction for the lesser of the premiums paid or cash value?

An individual with valuable art – why not gift the art to an institution that can put the art to a use related to its mission and receive a charitable income tax deduction for full fair market value of the art?

An individual with appreciated publicly traded securities – why not contribute the shares (avoiding capital gains to boot) directly to a charity?

Better yet, contribute significant amounts of cash or appreciated securities to a donor advised fund – which you can use for years to come to make your charitable gifts.

And, for the planned giving gurus amongst us: life estate arrangements and grantor lead trusts might be worthwhile to look at.

These are just a sampling of potential ideas to create significant charitable income tax deductions to offset taxable income generated by a Roth IRA conversion.

And maybe, just maybe, the Roth IRA conversion opportunity might wake up many people to the value of philanthropy.  If you aren’t a philanthropist yet, and you have significant assets which you want to set aside for your family’s future, now is the time to start thinking about it.

Jonathan Gudema, Esq. is a Managing Director in Planned Giving at Changing Our World, Inc., a philanthropic consulting firm advising nonprofits, philanthropists and foundations on effective strategies. Keep up with his blog at

He can be reached at

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