Donating to Charity to Lower Roth IRA Tax Bill

This is the first year that someone making more than $100,000 can use a Roth IRA. Roth IRAs have special tax benefits, but those who move retirement assets into a Roth must report a large amount of income and pay the tax bill to go with it. If you’re facing that tax hit this year, you should consider making charitable donations to offset the taxes.

Another way to offset these taxes is to take business loss deductions. However, charitable donations can be stretched out over five years whereas business deductions must be taken in the year of the loss. Further, donor-advised funds allow the donor to take the tax deduction this year while they can make the donations in future years.

An example of how a charitable donation can decrease your taxes is below:

“[I]f someone is rolling over $850,000 from a traditional IRA into a Roth IRA, they could expect to pay $286,545 in taxes, according to Fidelity Investments. That tax bill would drop by $73,850 if they make the same year a $211,000 contribution. However, in some cases the reduction could be enough to keep someone in a lower tax bracket.”

Donations Can Help Offset Roth IRA Bill, Financial Advisor, June 28, 2010. 

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.