Removing Funds from a Traditional IRA, Giving to Charity, and Leaving More to Your Kids

When converting a traditional IRA to a Roth IRA, you have to pay income tax on the assets being converted. Making smaller conversions over a number of years along with charitable contributions during those years could help offset much of the tax liability. 

Alternatively, removing funds from a traditional IRA and placing them in a charitable remainder trust may be a preferable option.  The following scenario is taken from Kelly Greene, Giving More to Both Kids and Charities, WSJ, March 20, 2010:

Suppose the parents want to convert a $500,000 IRA. Normally, that would generate about a $200,000 tax bill. But they could chop that bill to $105,000 by investing the $500,000 in a charitable remainder annuity trust.

If the trust paid the parents $32,500 a year, they could buy $1.6 million in life insurance that would ultimately go to their children. That is more than three times the value of the $500,000 IRA. Meanwhile, the trust would ultimately leave $600,000 to the charity, assuming 5% returns.

Special thanks to Marco Favila for brining this to my attention.