By Eric Kinaitis

Offsetting Taxes through Charitable Giving

Because of changes in the tax laws governing IRAs, many of your clients are now able to convert their traditional IRAs, 401(k), 403(b), or 457(b) accounts to Roth IRA accounts. One of the biggest stumbling blocks in deciding to convert, however, is their having to pay taxes on the converted amounts. You may be interested in learning that:Shark Bite

  • your client can make a Roth conversion and minimize the federal tax bite by utilizing the offsetting tax deduction from contributions of cash or a variety of other asset types to a donor advised fund (DAF).
  • your client can create a lasting legacy for his/her family’s philanthropic endeavors.
  • you can manage assets in the DAF on your familiar platform.

There are some important tax considerations your clients face in deciding to convert assets in a traditional IRA, 401(k), 403(b), or 457(b) to a Roth IRA account:

  • Roth IRA conversions are considered a taxable event
  • Taxes paid on the conversion should come from other (non-IRA) assets

A Tax-Advantaged Solution – Create a Companion Donor Advised Fund

Here is how the tax-free Roth conversion works. A client can establish a donor advised fund as a companion to the converted Roth account and fund the DAF with cash or a variety of appreciated asset types. The income tax deduction on the DAF contribution tends to offset the increased tax liability resulting from the Roth conversion. In summary, your client realizes the full intended benefits of the converted Roth account and achieves significant tax benefits:

  1. Full fair market value (FMV) deduction on assets contributed to the DAF.
  2. No capital gains tax on appreciated assets contributed to the DAF.
  3. The DAF deduction helps to offset federal taxes on the Roth conversion.
  4. There are no required minimum distributions from the Roth while the client is living. Required distributions to beneficiaries can be stretched over their lifetimes and distributions are free of taxes.
  5. No estate taxes on assets in the DAF; Roth assets are subject to estate taxes.
  6. Assets in the Roth and the DAF grow tax-free.

Clients will want to use cash or a variety of appreciated assets that are outside of their traditional IRA, 401(k), 403(b), or 457(b) accounts to contribute to the DAF, or pay any taxes due on any converted amounts that exceed DAF contributions. Using IRA funds for these purposes will generate an income tax liability and may generate a 10% early withdrawal penalty.

Your client will have a simple, cost-effective and tax-wise vehicle to create a legacy for family philanthropy over generations to come.

In addition to managing the converted assets and the companion DAF on your platform, you stay involved with these meaningful assets that the client would otherwise pay in taxes on a taxable Roth conversion. Everyone wins.




The collective impact of liberalizing tax laws for Roth conversions and the increase in income tax rates is triggering a surge in interest in conversions among affluent clients planning for retirement and wealth transfers. A  companion donor advised fund solution can mitigate the tax bite on the conversion.

Call us at 1-888-660-4508 or contact us to discuss the particulars of your client and their potential Roth conversion.

Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.