Clients can convert their traditional IRAs to Roth IRAs regardless of income or marital status. One of the biggest stumbling blocks in deciding to convert, is their reluctance to pay taxes on the converted amounts. You may be interested in learning that your client can offset the increased federal tax liability by opening a companion donor advised fund (DAF) and funding it with cash or appreciated assets. With a fully tax-deductible contribution to a DAF at iGiftFund, you will be helping your client make a tax-wise Roth conversion while you manage the investments in both the Roth and the DAF.
In a Tax-wise Roth Conversion your client:
- Establishes a DAF with iGiftFund alongside the converted Roth account.
- Contributes cash or a variety of asset types to fund the DAF (amount donated can be more or less than the amount converted).
- Takes income tax deduction resulting from assets contributed to the DAF. This deduction tends to offset the increase in AGI resulting from the Roth conversion.
- Enjoys the benefits of the converted Roth account creates a legacy for family philanthropy.
Benefits to your clients:
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- With a DAF, your clients will have a simple, cost-effective, and tax-smart vehicle from which to make grants during their lifetime and they’re creating a legacy for family philanthropy over generations to come.
- Income tax on the Roth conversion may be offset by a deduction for the contribution to the DAF.
- There is 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 on the DAF.
- Assets in the Roth and the DAF both grow tax-free.
Benefit to you, the trusted advisor:
- Increase your AUM by managing the assets in your client’s DAF, at all levels, in open architecture, on your familiar custodial platform.
- Add value to your trusted client relationship by introducing them to such a tax-smart solution that: addresses the “tax pain” of a Roth conversion; creates a charitable reservoir from which to give; and offers the opportunity to create a legacy for inter-generational family philanthropy.
Everyone wins
To offset the resulting tax liability, opening a companion DAF with non-IRA assets is a simple, tax-wise solution. As a result, your clients will mitigate their tax bite and take the first step toward building a meaningful legacy of family philanthropy. Even better, at iGiftFund, you maintain your relationship as a trusted advisor and retain the DAF in your assets under management – a win/win opportunity for everyone.
Note: When converting a traditional IRA, keep in mind:
- If subject to RMDs in the year of conversion, your client must take the RMD before converting 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:
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- reaches age 59½
- becomes disabled or dies
- makes a qualified first-time home purchase
- Roth IRAs have no RMDs during the lifetime of the original owner. Annual AGI limits and 5-year carryover provisions apply on amounts contributed to the DAF.
- There may be state income tax consequences for residents of certain states.
A client considering a Roth Conversion? Learn more about iGiftFund’s unique solutions and how we can work with you. Call 800.810.0366 or email Phil Tobin at [email protected] today.
On a related matter, if your client has a traditional IRA and is age 70½ or older – click here for iGiftFund’s solution for tax-free Qualified Charitable Distributions (QCD) that you can manage: With RMDs now starting at age 72, amounts taken as a QCD count towards RDMs.