Effective  January 1, 2010, anyone with a traditional IRA became eligible to convert part or all of the account to a tax-free Roth IRA.  The “fly in the ointment” is that funds transferred from regular IRAs into Roth IRAs are treated as taxable income.

The decision to convert to a Roth IRA hinges on a wide variety of factors, such as a person’s current and projected income tax rates, age, capability of paying the “conversion tax” (without using IRA money) and ability to let the Roth account grow undisturbed as long as possible.  Obviously, you should consult with your professional advisers, who may suggest a strategy of increasing your itemized deductions in the year of conversion.

Friends who support the American Red Cross might find the timing right for important gifts that can be deducted against the taxable income created by a Roth IRA conversion.  For example, IRA owners could “bunch” several years’ worth of annual contributions into one large gift.  Suppose you contribute $5,000 to the Red Cross every year.  In the year of your Roth IRA conversion, you could make five years’ worth of gifts ($25,000) all at once, possibly using appreciated securities, and thereby reduce your “conversion tax.” Or you might accelerate a gift you had planned to make through your will into a lifetime contribution.

Charitable gift annuities and charitable remainder trusts can also provide large deductions, plus lifetime income and additional flexibility in one’s tax and financial planning.   People planning to convert very large IRAs might consider establishing “grantor” charitable lead annuity trusts that make payments for a fixed time period to qualified organizations, then returns all trust assets to the donor or the donor’s family.

One particularly appealing gift vehicle for creating large deductions is the deferred payment charitable gift annuity.  For example, if you are 60 and would like to convert $25,000 from your traditional IRA into a Roth IRA, you will be taxable on that $25,000 — unless you can somehow come up with additional itemized deductions.

You might decide to transfer $60,000 from your money market account for a deferred payment charitable gift annuity.  The gift annuity would begin paying you $5,160 (8.6%) at age 70, but you also receive an immediate income tax deduction of about $25,000 that virtually erases the Roth IRA conversion tax.  After five years, all withdrawals from your Roth IRA will be tax exempt, and a portion of your future charitable gift annuity payments will be tax free, as well.  Your charitable gift annuity agreement can contain an option to start payments before age 70, at reduced levels.

The most important ingredient in all these strategies is a desire to support the humanitarian programs of the American Red Cross. Your gift supports the lifesaving mission of the American Red Cross in your community, across the country and around the world. Our office would be pleased to help with illustrations of gift plans that will be of assistance to you and your advisers.