charitable remainder trust – Retirement Income Center

As is evident by the sheer number of blog posts to date about Roth IRA conversions – 33 – there’s a lot of things to consider when deciding whether a Roth IRA conversion makes sense for you. These include, but are not limited to, the following questions:

Should you do a Roth IRA conversion?
How much traditional IRA should be converted?
In which year(s) should a conversion be made?
Should you employ a multi-year conversion strategy, and, if so, what’s the best plan for you?
At which point during a particular year should a conversion be done?
Does it make sense to do multiple conversions in a single year?
Even though the income from a conversion in 2010 can be deferred to 2011 and 2012, should you do a conversion in 2010?
If you do a Roth IRA conversion in 2010, should you go with the default of reporting 50% of the conversion income on your 2011 tax returns and 50% on your 2012 returns or should you instead make an election to report 100% of your conversion income on your 2010 income tax returns?
Will your income tax rate be higher or lower than what it is now when you take distributions from your IRA accounts?
Which assets should be converted?
Should you set up multiple Roth IRA conversion investment accounts?
Is the current primary beneficiary of your traditional IRA a charity?
Are there retirement plans available for conversion other than active 401(k) plans?
What is the amount of projected income tax liability attributable to a potential conversion?
When will the tax liability attributable to the conversion need to be paid?
What sources of funds are available for payment of the tax liability?
Will withdrawals need to be made from the converted Roth IRA within five years of the conversion?
Do you have a life expectancy of five years or less with no living beneficiaries?
Do your itemized deductions and personal exemptions exceed your gross income such that you can convert a portion, or perhaps all, of your traditional IRA to a Roth IRA without incurring any income tax liability?
Do you own a rental property with a large passive activity loss carry forward that you can sell and do a Roth IRA conversion while incurring minimal or no income tax liability?
Is there a net operating loss that you can use to offset Roth IRA conversion income?
Is there a large charitable contribution available from the establishment of a charitable remainder trust that can be used to offset income from a Roth IRA conversion?
What is the basis of your traditional IRA, i.e., how much of your IRA has come from nondeductible IRA contributions or qualified retirement plan after-tax contributions?
Are you a surviving spouse in a low tax bracket who isn’t dependent on your IRA and one or more of your children are in a high income tax bracket?
What are the years and amounts of your projected required minimum distributions with and without a Roth IRA conversion?
What is the amount of projected taxable Social Security benefits that can be reduced by doing a Roth IRA conversion?
Do you have a SEP-IRA that can be converted to a Roth IRA?
Do you have a dormant 401(k) plan that can be converted?
How will a Roth IRA conversion affect financial aid qualification?
Will your Medicare Part B premium increase if you do a Roth IRA conversion?
If you do a Roth IRA conversion in 2010, will your Medicare Part B premium increase in more than one year?
What are the income tax consequences of a partial 72(t) Roth IRA conversion?
Should you not do a full Roth IRA conversion and instead leave funds in your traditional IRA for future nondeductible IRA contributions?

Feeling overwhelmed? Read Part 2 next week.

Last week’s blog post, The Ideal Roth IRA Conversion Candidate – Part 1, discussed two situations where it’s possible to convert a portion, and possibly all, of a traditional IRA to a Roth IRA while incurring minimal or no income tax liability attributable to the conversion. This week’s post presents two additional Roth IRA conversion “ideal candidates.”

As mentioned in last week’s post, all four situations, in addition to assuming availability of a traditional IRA, require preparation of an income tax projection, including calculation of potential exposure to alternative minimum tax, or “AMT,” to determine the amount of the traditional IRA that should be converted to a Roth IRA to achieve this result. The two situations that are the subject of this week’s post are as follows:

Net operating loss
Large charitable contribution deduction from establishment and funding of charitable remainder trust.

Net Operating Loss

If your deductions for a particular year exceed your income, which typically occurs from operating a business, you may experience a relatively rare tax phenomenon known as a net operating loss, or “NOL.” Generally, if you have an NOL, you are required to carry back the entire amount to the two years before the NOL year, unless you make an election to waive the carry back period, and then carry forward any remaining NOL for up to 20 years after the NOL year.

Your ability to use an NOL in a particular year is dependent upon the amount of your other income during the year. If you have an NOL, you may need to generate additional income to be able to utilize part, or all, of your NOL carry forward. If you are in this situation, an income tax projection should be prepared to determine the amount of traditional IRA you should convert to a Roth IRA to be able to utilize your NOL carry forward while incurring minimal or no income tax liability.

Also, if you have an NOL in the current year and are debating between carrying it back two years or making an election to relinquish the carry back period and instead carry it forward to next year, having a traditional IRA could be the deciding factor. While you may not be the ideal candidate for a Roth IRA conversion this year, the ability to offset income from a Roth IRA conversion with an NOL carry forward next year could prove to be quite beneficial.

Charitable Remainder Trust

Do you own any assets that you have been reluctant to sell because the sale would result in a large capital gain and sizeable tax liability? The establishment and funding of a charitable remainder trust, or “CRT,” is an income and estate planning technique that can be used to defer large capital gains while generating a large charitable contribution deduction in addition to providing portfolio diversification and an ongoing future income stream, making it a potent retirement income planning tool in the right situation.

The grantor of a charitable remainder trust is entitled to a charitable contribution deduction equal to the fair market value of the remainder interest of the property being transferred to the CRT. This deduction is limited to 30% of adjusted gross income (“AGI”), with the excess amount carried forward to future years. Given the size of the charitable contribution deduction resulting from establishment of a typical CRT, it isn’t unusual that a large portion of the deduction is unusable in the year of establishment of the CRT and must instead be carried forward.

If this is the case, an income tax projection should be prepared to determine the amount of traditional IRA that should be converted to a Roth IRA in the year of establishment of the CRT to generate additional AGI to free up an additional charitable contribution deduction that won’t result in an increase in income tax liability.

If you fall under one of the two scenarios above and it is projected that you will incur minimal or no income tax liability in connection with a partial or full Roth RIA conversion, you may be an ideal candidate for a Roth IRA conversion.