SmartAsset’s ad reads, “We’re 62 years old with $950K in IRAs. Is it too late to convert to a Roth IRA?”
The debate relates to the individual’s income tax liability when converted and whether there is enough time to grow the account prior to potential income needs arising.
How many of your donors may be considering this change, and does it present an opportunity for charitable giving? The answer to the second question is “yes” in the short term and likely “no” in the long term.
As consultants, we have worked with nonprofit clients whose donors have been advised to make this conversion in recent years. When this happens, our response is “Now may be the right time for your donor to make a charitable gift to offset the tax burden.” Outright gifts may include highly appreciated securities, a DAF funding or creating a charitable remainder trust.
In the longer-term view, this might cause a decrease in the amount of funds charities receive from IRAs during their donors’ lifetimes.
In the last few years, we have seen a significant increase in qualified charitable distributions (QCDs) from traditional IRAs. These are appealing to donors because they avoid the tax on the IRA withdrawal, and QCDs can count toward their annual RMD after age 73. QCDs are a good way for older donors to make immediate charitable gifts.
With a Roth IRA, all distributions to the donor are tax-free, including any future growth in the account; therefore, a QCD would be less appealing.
We teach fundraisers in our seminars to listen to donors and their advisors and look for opportunities to connect goals and intentions with the best gifts for the donors according to their age and stage in life. Ideally, your donors benefit, and so do the charities they support.
Joe Chickey, MBA, CFP, is a senior vice president and senior consultant. You can connect with Joe via LinkedIn or at joe.chickey@sharpegroup.org.
Let’s consider looking at this IRA and Roth Conversion through a different lens.
If a donor make the conversion of say $5000 in one year they have to report that $5000 as taxable income.
Now if the donor in the same year makes a $5000 outright gift of cash or appreciated assets to the their favorite charity and they itemize, the last being a key point one transfer offsets the other.
Now with the same $5000 withdrawal and conversion the gift is made with appreciated securities of close to the same value, the result is the same and the cost of the gift is the same as it has the same income tax impact.
Now the donor get creative and makes a $10,000 gift to a DAF and a $5,000 conversion. The tax impact works in the donor’s favor, the conversion does not cost as much as when the amounts were equal.
Now let’s say there is a $10,000 gift to a charity for the payment of a $100,000 life insurance policy and a $5,000 conversion. The long term impact for the charity is much greater. Note: you obviously have to run the numbers and make sure the policy is a short 5 to 7 year payment plan.