Fund raisers who solicit large gifts need to become knowledgeable about the charitable aspects of a law that allows people to covert their regular individual retirement accounts into Roth IRAs this year, says Robert F. Sharpe, a Memphis planned-giving consultant.
Regular IRAs grow tax free until withdrawals are made. But Roth IRAs are created with after-tax assets: That means people can use Roth IRAs to set aside money to tap into tax free at a later date–or pass along those assets tax free to heirs, an attractive option for many wealthy individuals.
Starting this year, people whose incomes were too high to qualify for Roth IRAs in the past can now take advantage of them. But anyone shifting money from a traditional to a Roth IRA must pay taxes on the money. This year alone, they have the option of spreading the taxes between 2011 and 2012.
Charitable giving can help offset some of that tax liability, notes Mr. Sharpe. He points to a recent New York Times article that provides an illustration of how a donor who shifts $100,000 into a Roth IRA can save 16 percent of the $35,000 he would owe in taxes by using some of the money to set up a charitable gift annuity.
Not only would the arrangement provide the donor’s heirs with nearly $75,000 tax free at his or her death; it would also provide a small income stream to the donor during his or her lifetime. And money left over in the annuity, an estimated $42,000, would go to a charity of the donor’s choosing.
“Donors are going to be reading about this idea and calling development officers who don’t have a clue in many cases,” says Mr. Sharpe. That, he says, could hurt them when competing with nonprofit groups that are prepared to work on gifts related to Roth IRA conversions.
Institutions that are prepared, Mr. Sharpe notes, include Cornell University and the Cleveland Clinic. Both are using their Web sites and other communications to tell donors how charitable gifts might enhance their ability to save taxes on Roth IRA conversions.