Before 2010, most people could not afford to convert an IRA into a Roth IRA. After 2010, the income restrictions that stopped them from doing so were scrapped. But one thing that hasn’t changed is that Roth IRA contributions typically trigger a taxable event. There are few ways of getting around this taxable event: IRA to charity contribution.
If you’re receiving required minimum distributions and are charitably inclined, you have an opportunity. You can move your IRA savings into a Roth IRA with a conversion that is offset, reducing the taxes you would normally face.
You can offset your Roth IRA conversion tax burden with a charitable contribution.
Under normal circumstances, you would be taxed for the amount you converted from your IRA into a Roth IRA. But if you take a regular distribution from your IRA, convert it to a Roth IRA, and donate the amount you transferred, you can write it all off.
Imagine you make exactly $100,000 after taxes. You want to donate a lot of money, but you also want to transfer money to your Roth IRA to prepay the taxes you’d face in your retirement. If you donate half of your income ($50,000), you can offset the same amount from a Roth Conversion. In this case, a $50,000 conversion into your Roth IRA can be completely written off with a charitable contribution to a qualified charity.
This opportunity allows you to pay more money now and sets you up to have a simple retirement income and not need to pay taxes on withdrawals. Also, you can ensure that your hard-earned money goes to the qualified charity of your choice instead of the IRS.
Advantages Of Roth IRA Conversions
If you’re not feeling charitable right now, you may be wondering why you should pay an equal amount to convert your IRA into a Roth IRA.
The simplicity and comfort of a pre-taxed Roth IRA speak for themselves. You don’t need to worry about required minimum distributions, you can always know exactly what you have, you control over what is left to your beneficiaries, and you won’t have to pay taxes on it. This means even more control over your finances in retirement.
Factors To Keep In Mind
If this opportunity sounds like one you’re interested in, that’s great! But first, you will need to keep a few things in mind.
Not all transactions that are charitable in nature are seen as “charitable contributions” by the IRS. Your donation must follow the IRS rules surrounding qualified charities to be able to write off your donation.
The charities that qualify for charitable contributions are qualified under section 170 (c) of the Internal Revenue Code.
The qualifications are written as follows:
- A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
- A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- A church, synagogue, or other religious organization;
- A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
- A nonprofit volunteer fire company;
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
Timing & Limits
For your charitable contributions to qualify, you must make them before the end of the tax year. If you donate any non-cash asset, you can deduct the fair market value of that property.
Under typical circumstances, the IRS allows you to deduct up to 50% of adjusted gross income, such as for cash donations. In some other cases, deductions are limited to 30% of adjusted gross income, such as donations of appreciated stock. In addition, donations to Donor Advised Funds (DAFs) do not count. For precise limits, you need to refer to the Internal Revenue Code or a qualified tax professional.
Keep in mind that most qualifying organizations are domestically formed. Some Canadian addresses listed under foreign organizations can qualify due to tax treaties. Otherwise, deductions to foreign organizations are not deductible.
You will need to make sure you receive a receipt for your charitable donation just like any donation. For donations of more than $250, you will need to obtain written acknowledgement from the charity for each donation which includes the charity’s name, amount paid, description, and an estimate of the value of any goods/services provided by the charity. When you make nonqualified withdrawals from an IRA, you need to pay a 10% early withdrawal tax. If you’re over 59 ½ years old, you won’t need to pay the tax. In addition, any rollover from an IRA must be reported to the IRS with Form 8606 when you file your income taxes.
If you want to prepare for a Roth IRA rollover, you may want to consult a tax professional. That way you can ensure that you comply with the IRS and avoid costly mistakes. The strategy we’ve just gone over has significant financial implications. It pays to ensure everything is done correctly so you can enjoy your future tax-free Roth IRA distributions. Contact Cerebral Tax Advisors for a Tax Discovery Session through this link today!