This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Are you going to miss the opportunity in 2023?

Imagine it is New Year's Eve, and you receive a text. It is from Mary, a client enjoying a year-end celebration. Mary sends you a selfie with a backdrop of champagne and fireworks at Disney, thanking you for the most valuable New Year's gift ever - what she views as financial security for her and her family.

You see, a month earlier, you had spoken to her about an opportunity many people do not even realize exists. You told her, "If you are considering a Roth IRA conversion for its many benefits, remember to set up a Donor-Advised Fund before the end of 2023. Your Donor-Advised Fund will not only secure a 2023 tax deduction but can also offset some of the tax implications of the Roth conversion, making a portion of the conversion, in essence, 'tax-free.'"

Why the selfie and the thank you?

Mary was celebrating New Years and your financial strategy that perfectly aligned her retirement planning, tax savings, and philanthropy - all before the clock rang in the beginning of 2024.

Financial planning often hinges on navigating mazes of complex tax rules and retirement provisions. Real art involves synthesizing these elements into a coherent, valuable strategy. An example of this involves Roth IRA conversions, donor-advised funds (DAFs), and the concept of bunching. This alignment can almost make a portion of your charitably inclined client's Roth conversion "tax-free."

Let us take a look at this.

The Good and the "Taxing" of a Roth Conversion

Converting a traditional IRA to a Roth IRA offers many benefits, such as no unwanted Required Minimum Distributions (RMD) and tax-free withdrawals in retirement. However, a Roth Conversion comes with a taxing problem – IRS taxes the entire conversion amount as ordinary income in the year of the conversion.


It is a bitter pill to swallow with immediate tax ramifications. Here is where the ingenuity of combining the Roth conversion and the Donor-Advised Fund kicks in.

Bunching Contributions

Bunching means accelerating multiple years' worth of your client's charitable contributions into a single tax year through a Donor-Advised Fund. This action significantly boosts your itemized deductions, countering the Roth conversion's taxable income.

Double the Fun

With this strategy, you can gain further benefits if you donate appreciated assets for your Donor-Advised Fund contributions. Donating these assets accomplishes two key things - you completely eliminate the capital gains taxes, and because you made a gift of that asset to the Donor-Advised Fund, you receive a charitable deduction at the asset's current market value.

For example, if Mary hypothetically had $500,000 in a stock initially purchased for $80,000. Mary has a taxable gain of $420,000. At a 20% federal capital gains tax and, let us say a 5% state tax and a 3.8% Medicare tax, Mary would owe almost $121,000 in taxes.

Mary can eliminate the capital gains tax of almost $121,000 by contributing the stock to her Donor-Advised Fund. Plus, she gets a charitable deduction based on the full $500,000 value.

IRS Rules

Understanding IRS rules is important. Your client can deduct up to 30% of their Adjusted Gross Income (AGI) for appreciated assets and up to 60% of AGI for cash. Remembering this enables you to finesse your contributions for maximum tax benefits.

Why Convert to a Roth IRA

What sets a Roth IRA apart is the flexibility and control it offers. No Required Minimum Distributions (RMDs) allow your client's investments to grow tax-free indefinitely. Plus, any withdrawals made post-retirement are tax-free, further enhancing financial freedom.

Your Legacy to Your Heirs

Consider the impact of your Roth IRA not just on your financial well-being, but on your heirs. They inherit the Roth IRA income tax-free, with no RMDs, plus ten more years to enjoy the same tax-free growth as your client enjoyed.

The Concept of a "Free" Roth Conversion

The strategic alignment of Roth conversions, bunching contributions, and appreciated asset donations can essentially neutralize some of the tax implications of converting to a Roth. Reducing taxable income and the additional deductions can work in concert to offset some of the tax liability, making a portion of your Roth conversion "tax-free."

Tax-Free Growth

Since any growth in your Donor Advised Fund grows tax-free, it magnifies your philanthropic reach over time. The tax-free growth can potentially keep your philanthropic mission alive after all of the original contribution has been given to charities.

Combining these two strategies is not just about cleverly leveraging tax codes, it is about a well-rounded financial plan that combines retirement security, tax efficiency, and impactful philanthropy.

But, This May Not Be For Everyone

Before implementing this strategy, the financial assessment of your client is critical. Review their current asset portfolio, consider their philanthropic inclinations, and plan for your heir's future. Remember, donations made to the Donor-Advised Fund are irrevocable gifts, meaning, once donated, you can not take them back.

Final Thoughts

Many times, the most effective strategies involve multiple wealth management strategies. Combining a Roth conversion with a Donor-Advised Fund before the year-end deadline is not just what we view as smart—it is a holistic approach that brings together the best of retirement planning, tax minimization, and charitable giving.

So, as the clock winds down in 2023, seize this golden opportunity to offer your clients a triple-win solution. After all, providing clients with innovative, timely, and impactful advice might get you a selfie from a client texted to you at 11:59 p.m. on December 31, 2023!

How Dunham Can Help

If the concept of a nearly "free" Roth conversion makes sense, call us for a detailed case study and our Roth IRA/DAF Calculator. You can reach our Business Development Team at 858 964 - 0500


This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

Dunham does not provide legal or tax advice. Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Dunham cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. All financial decisions and investments involve risk, including possible loss of principal.

A donor advised fund is a separately identified account that is maintained and operated by a section 501( c)(3) organization, and is not a registered investment company.

Contributions to a Donor-Advised Fund are irrevocable contributions. Individuals considering a contribution to a Donor-Advised Fund should consult their legal and tax advisors regarding deductions, based on their personal considerations.

Administrative services fees and other fees may apply. There may be additional fees charged by the Financial Advisor that is separate from the administrative and impact investment fees.

Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Always consult an attorney or tax professional regarding your specific legal or tax situation.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

All examples are hypothetical and for illustrative purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives.

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