Roth IRA Conversion Strategy with Donor Advised Funds

An interesting strategy, so let us set the stage:

Valuable Tool: Converting Traditional IRAs to Roth IRAs remains a valuable tool for your clients – regardless of income or marital status.

Challenge: Taxes resulting from the amount converted often give clients pause.

Solution: Mitigating the tax liability caused by the conversion may be realized by opening a companion donor advised fund (DAF) and funding it with cash or appreciated assets.

DAFs: Simple to Implement, Powerful in Impact

If you are new to DAFs, or need a quick refresh, explore the basics here:

What is a donor advised fund?

How donor advised funds work.

With a fully tax-deductible contribution to a DAF, you will help your client make a tax-wise Roth IRA conversion while managing the investments in both the Roth and the DAF.

Tax-Smart Roth Conversion: How It Works with a DAF

In a tax-smart Traditional IRA conversion to a Roth IRA in conjunction with a DAF, your client:

• Establishes a DAF (with iGiftFund) alongside the converted Roth account
• Contributes cash or a variety of other asset types to fund the DAF (amount donated can be more or less than the amount converted)
• Takes an income tax deduction resulting from assets contributed to the DAF
• Enjoys the benefits of the Roth conversion and creates a legacy for their family philanthropy

Traditional IRA to Roth IRA Conversion Strategies: Key Benefits for Your Clients

A DAF provides your clients with a simple, tax-smart vehicle to support grantmaking both during and beyond their lifetime, establishing a lasting family philanthropic legacy.

Additional client benefits include:

• Income tax resulting from the Roth conversion may be offset with a charitable deduction for the DAF contribution
• No capital gains tax on long-term, appreciated assets contributed to the DAF
• Larger, tax-free withdrawals from the Roth since there are no RMDs on the Roth
• No estate taxes since the assets are no longer part of the client’s estate and belong to the DAF
• Tax-free growth to both the Roth and DAF assets

Roth Conversion and Charitable Giving: Financial Advisor Benefits

By integrating Roth conversions into a broader financial plan, advisors can differentiate themselves and deliver real, quantifiable value to clients.

Tax-smart IRA conversions + DAF strategies = real client value and trusted advisor status

• Addresses Roth conversion “tax pain”
• Creates a charitable reservoir for giving
• Creates a legacy for inter-generational family philanthropy

Roth Conversion Tax Optimization: Important Notes

When converting a Traditional IRA to a Roth IRA, keep in mind:

• If subject to RMDs in the year of conversion, your client must take the RMD before converting them to a Roth.
• RMD amounts are not eligible to convert to a Roth IRA.
• Converted assets must remain in the Roth IRA for at least 5 years to avoid penalties and taxes.
• A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and the client meets at least one of the following conditions:
  • 59½ years old and after 5 years
  • Becomes disabled or dies
  • Makes a qualified first-time home purchase
• Roth IRAs have no mandatory distribution requirements.
• There may be state income tax consequences for residents of certain states.

Contact iGiftFund – Our experienced professionals are here to assist and provide insights on seamlessly integrating DAFs into your practice.