Increased charitable donations may help offset the taxable income resulting from a Roth conversion
Making a charitable contribution may offset the potentially increased income tax liability incurred from the conversion of a traditional individual retirement account (IRA) to a Roth account.
Steps you might take now
If you plan to accelerate income or convert to a Roth account, consider increasing your planned charitable contributions in the year in which you incur the additional income. The extra tax deduction from your donations may help offset the increase in your taxable income.
In addition, if the charitable donation is made to a public charity that sponsors a donor-advised fund program, you'll be able to use the proceeds from a single donation to support multiple causes this year and into the future.
The Charitable Offset Strategy*
Hypothetical example: Making a qualified charitable contribution may reduce the tax cost of this Roth conversion by $39,600.
Hypothetical tax amounts assumed a married couple filing jointly, 2013 federal ordinary income tax rates, $300,000 of taxable income, $500,000 Roth conversion amount and a $100,000 fully deductible charitable contribution. Taxes would have been $75,313 with no conversion and no charitable contribution. The overall limitation on itemized deductions, other limitations, the federal alternative minimum tax, and state and local taxes are not taken into account.
See how a charitable donation may minimize the tax impact of a Roth conversion.