By Sheryl Rowling
SAN DIEGO — I’m willing to bet that many of you converted IRAs to Roth IRAs last year. And, because we’ve been told that 2011 and 2012 tax rates will remain the same as 2010 rates, most of you likely opted to pay the conversion tax over two years, starting in 2011. Higher income this year means you’ll be facing higher taxes.
Even if you’re taking portfolio losses, only $3,000 can be used to offset conversion income. Coming up with additional deductions might be helpful, but might also lead to Alternative Minimum Tax. How can you lower your tax bill? A donor advised fund might be the answer.
Let’s get to your question!
Dear Money Maven:
What is a donor advised fund? Can it help me pay less tax?
Yours Truly, Tired of Taxes
Dear Tired: A donor advised fund (DAF) works like a “charitable IRA.” The donor –you – contributes cash or appreciated securities to the fund and receives an immediate charitable deduction equal to the fair market value of the contribution. The fund can invest the proceeds, which can earn income on a tax-free basis. The donor can then recommend grants from the fund to pay out to qualified charitable organizations.
The benefits of a DAF are many:
- Immediate tax deduction upon contribution to the DAF
- Tax-free earnings within the DAF
- A pool from which the donor can make contributions currently or in the future
Establishing and making significant DAF contributions this year can offset Roth conversion income. And, better yet, charitable contributions are not subject to Alternative Minimum Tax! If you normally makes charitable donations and you’re expecting higher income this year (because of Roth conversion income), a DAF could be right for you!
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Sheryl L. Rowling, CPA/PFS, partner of Moss Adams Wealth Advisors LLC, has been providing tax, financial planning and investment advice for over 30 years, since 1979. Sheryl was named one of the nation’s top 250 financial advisers by Worth magazine, received recognition as one of Accounting Today’s 100 Most Influential People, and was named a FIVE STAR Wealth Manager by San Diego Magazine*. Contact her at sheryl.rowling@sdjewishworld.com
According to the Jewish Community Foundation of San Diego (www.jcfsandiego.org), the steps to establishing a DAF are:
- Start your fund by signing a simple agreement which can be completed in minutes.
- Transfer assets of $1,800 or more.
- Receive an immediate charitable tax deduction for the full fair market value of assets you transfer. For appreciated assets, you may eliminate capital gains tax.
Once the fund is established, you can:
- Make additional contributions of any amount at any time, with full tax advantages.
- Recommend how the assets are invested so your fund grows tax free, giving you more to give to the community.
- Recommend grants to your favorite organizations in areas such as health and human services, the arts, and education, in the Jewish and general community all over the world.
- Access your Fund online, conduct transactions, and view giving opportunities using the Foundation’s secure Donor Central online Fund portal.
- Let the Foundation take care of all administrative responsibilities and consult with the staff for personal advice about community needs, areas of interest, and a range of philanthropic services.
- Participate in the Foundation’s Philanthropy Connections series of educational programs and network with other funders.
- Pass on to your children the ability to recommend grants from the Fund now and after your lifetime.
- Use the Fund to create a legacy for the community.
For more information, please contact the Jewish Community Foundation, either through their website (above) or by phone at (858) 279-2740.