Recent changes in the Secure Act are prompting an increasing number of your clients to consider Roth conversions. You are in a unique position to help your clients lessen the tax impact of the conversion and enhance your relationship as trusted advisor all while adding long term AUM. It’s a win-win situation.
Problem: How to handle the tax liability generated when converting a traditional IRA to a Roth IRA?
Solution: Your client contributes assets to a donor advised fund at iGiftFund. The charitable deduction resulting from the gift is used to offset the federal income tax liability generated from the Roth IRA conversion. From then on, both the Roth and the DAF grow tax-free.
Here is how the tax-free Roth conversion works:
You establish a corporate non-profit account on your platform in iGiftFund’s name, for the benefit of (FBO) your client’s DAF, funded by your client’s tax-deductible charitable contribution. The charitable investment account is set up FBO the client’s DAF, right alongside the client’s converted Roth account – and you manage both funds. The income tax deduction on the DAF contribution tends to offset the increased federal tax liability resulting from the Roth conversion.
In summary, your client realizes the benefits of the converted Roth account and the following additional benefits:
- The income deduction for the DAF contribution tends to offset federal taxes on the Roth conversion.
- There are no capital gains tax on gifts of appreciated assets to a DAF.
- Neither the Roth nor the DAF require annual distributions.
- Assets in the donor advised fund are not subject to estate taxes but assets in the Roth are subject to estate taxes.
- Assets in both the Roth and the DAF grow tax-free.
- You manage assets in the Roth and the DAF on your familiar custodial platform.