Despite new 2010 Roth IRA conversion rules that lift income limits and allow clients to smooth tax payments over two years, few investors are biting. A survey from Putman Investments released last week found only 14% of respondents were considering converting some or all of their traditional IRA assets to a Roth IRA either this year or next, with a majority (56%) saying they definitely would not convert.
But a Roth conversion provides numerous benefits for the appropriate client; one of which, says Andrew Hastings, vice president of business development National Philanthropic Trust, is in building a charitable legacy.
“If your client converts and pays the taxes over the next two years, the account obviously then grows tax-free,” Hastings says. “If he makes a charitable contribution, it can offset the taxes he’ll pay. If he is charitably inclined, it’s a win-win.
The giving vehicle the Roth is then linked to depends on the amount bequeathed. According to Hastings, three options immediately present themselves; a checkbook, a donor-advised fund or a family foundation.
“What are your client’s objectives?” he asks. “If it’s a relatively small amount, cut a check directly to the charity, get the gift receipt and itemize it on his taxes.
Donor-advised funds, he notes, are usually seeded with a minimum of $25,000.The fund will grow tax-free and the donor can stipulate to whom the donation is made. It takes philanthropy out of the checkbook and grants more control and empowerment to the client. Upon death, the remainder can be distributed to beneficiaries, or the client’s heirs can take control and continue the charitable legacy.