Printer Friendly

How to avoid Roth conversion taxes: use a charitable gift annuity: take the chance to enhance the charitable planning conversation with clients.

All planners want to talk to their clients about the various "hook mindsets" that serve as planning opportunities--saving income taxes, which a pension plan will do; creating a higher payout on principal, as with an immediate annuity; and creating a tax deduction along the way, which always grabs the attention of people with high incomes or large estates. In the meantime, the hinges have finally been taken off the door for the Roth conversion limits, and planners see this as a new conversation to have with existing clients.

When you convert a very taxable asset to an income tax-free asset, you can save a tremendous amount of asset potential for heirs. Taxes are a common objection to conversion, even though they can be spread over a three-year timeframe. But this usually brings the deal to a halt, and our IRA-holders begin thinking, "Do I want to pay the tax now, or keep sitting on my IRA for a little while longer?"

A conversation about a charitable gift annuity can occur from many angles, but the most attractive angle is when you can talk about it in the same breath as an IRA Roth conversion. This conversation includes the following points:

* Clients can significantly increase their current income from their IRA over their lifetime.

* They pay no current taxes on exchanging money from a bank to a charity.

* They can leave their heirs more of a legacy by eliminating future taxes on the Roth IRA.


A charitable gift annuity (CGA) converts practically any asset into a tax-favored income stream for one or two lives. A charitable installment bargain sale (CIBS) provides a term-certain payout that will extend payments to beneficiaries after the primary annuitants pass away. You (or the client's other advisors) will need to conduct more sophisticated charitable planning if the client wants multiple layers of beneficiaries; however, for most situations, a simple CGA or CIBS is appropriate. For simplicity's sake, we'll simply refer to the general concept as a gift annuity.

Here's an example: A couple in their 60s with charitable intent want to give a gift, save the capital gains taxes due on stock appreciation, and guarantee a steady income with no market risk. They have $200,000 in stock to transfer, with a capital gain of $100,000. The charitable gift annuity provides a tax deduction of $60,700, forgives $4,553 of the total capital gains tax of $15,000, and provides an income for 20 years at $14,550 per year--a 7.3 percent payout rate.

Let's say they want to convert $100,000 from a traditional IRA to a Roth. They have to recognize the tax, but not until 2011, when they need to recognize only half of the transfer amount for tax purposes. So the transfer this year costs nothing, and next year, only $50,000 is taxed--half the original transfer amount.

If the client transfers $375,000 of nonqualified assets to the gift annuity program, they would enjoy a tax deduction of $125,000, which can be spread over five years. In 2011, they have a current income of $50,000; add to that the $50,000 of the original IRA transfer that is now being recognized for tax purposes, and you have a 2011 income of $100,000. If they are in a 25 percent bracket, they will pay $25,000 in income taxes that year--but thanks to the tax deduction from the gift annuity transfer, they may not have to pay any income taxes in 2011.

On top of that, the $375,000 donation will yield $519,000 of income to the donor over their lifetime, and because of exclusion ratios contained in nonqualified annuities, the income tax due on the annuity income will be reduced further until the cost basis of $375,000 has been paid out.


The availability of the Roth IRA conversion has greatly enhanced the conversation about charitable intent and provides the opportunity for the advisor to separate from the traditional planning pack by leveraging the tax deductions against taxes owed. If the client doesn't need the annuity's income to sustain their standard of living, they can leverage tax-favored charitable income even further by purchasing a survivorship life insurance contract, creating a greater tax-efficient legacy for surviving partners, children, or charities.

Clients today are interested in having these very conversations. Since the economic meltdown, older clients have been looking for guarantees and solutions from the planners with which they contract--solutions that take their retirement income out of harm's way. This gift annuity strategy is suitable for those with charitable intentions who want to create income from the gift while still alive--the kind of solution planning that clients will appreciate hearing from you. "

LIMRA Study Sheds Light on Immediate Annuity Trends

Women buy six of every 10 immediate annuity contracts, according to LIMRA's Guaranteed Income Annuities report.

LIMRA examined more than 55,000 immediate annuity contracts issued in 2008 and 2009 and the people who purchased them to help companies better understand and customize their products to target specific markets and capture more of the unrealized annuitization market, which LIMRA estimates to be $250 billion.

Other LIMRA findings include:

* The average immediate annuity purchase age is 73. Immediate annuities purchased with pre-tax money were more likely to be clustered around ages that correspond either to the onset of Social Security benefits or IRS-required minimum distributions.

* The average immediate annuity premium was just over $107,000.

* Seven out of 10 immediate annuity buyers purchased lifetime guaranteed income contracts.

* Nine out of 10 lifetime income annuity buyers chose payments that were guaranteed for a certain period of time or provided a refund guarantee that made it possible for beneficiaries to recoup some or all of the remaining premium.

Many immediate annuity contracts offer the option to increase payouts by a fixed amount or adjusted by inflation. However, LIMRA found that 93 percent of income annuity contracts have no automatic payment increase. LIMRA believes the demand for inflation-protected guaranteed payouts will grow as more retirees live longer.

SOURCE: LIMRA, "Guaranteed Income Annuities" report

Barry Goldwater is an insurance specialist practicing in Newton, MA. He works with CPAs and financial planners designing appropriate risk management strategies and ideas for their clients. He can be reached at 617-527-9736 or
COPYRIGHT 2011 Summit Business Media
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2011 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Goldwater, Barry
Publication:Agent's Sales Journal
Date:Jan 1, 2011
Previous Article:The beauty of a cash balance buy-out tool: solving the sale of an insurance agency owner's share.
Next Article:Finding and working with a third-party administrator: how partnering with a TPA on retirement plans can benefit all.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters