Mar 30, 2010

Philanthropic Planning and the Roth Conversion: A symbiotic relationship.

Hummingbirds interact perfectly with flowers that are long and tubular. The hummingbirds have special beaks and quite a pair of wings that allow them to get to the nectar in these flowers. Their special design reduces the competition for the birds in this part of the flower market. The flowers are better off as well because hummingbirds tend to stick with similar flowers, thus pollination is more efficient between these types of flowers.

It is easy to get caught up watching these birds in action. The symbiotic relationship they share is quite amazing. The unique and specialized design of a group of creatures allows them to compliment each other and the ecosystem benefits.

It may come as a shock, but there is a sort of symbiotic relationship at work between folks that are philanthropic and the IRS. Hard to believe, I know. We understand that the IRS gives tax breaks for charitable givers because they enhance society. In special circumstances, charitable families can find tax breaks that many others will not reach, similar to the nectar only available to the unique and capable hummingbirds.

The Philanthropist and the 2010 Roth Conversion. At the beginning of 2010, the $100,000 MAGI (Modified Adjusted Gross Income) limit on Roth IRA conversions was lifted. Individuals that were not able to convert an IRA to a Roth in previous years may now be eligible, and the subject is getting quite a bit of news.

When a standard IRA is converted, it creates a tax liability. For most investors this liability is paid from outside of the IRA. This taxable income is added to their income for the year and the total is reduced by deductions.

For someone who is charitable, the deductions from giving to tax exempt organizations helps to offset income each year. In the same way, the income from a Roth conversion can be offset by charitable giving outside of the IRA. Instead of writing a huge check to the IRS to pay the tax liability, you may be able to offset a large portion of that tax by making a contribution to the organizations in your community that you support.

A unique opportunity: Charitable Carryforward. Many philanthropic families support numerous organizations in their communities and give enough that they cannot use the full tax benefit of their gifts in that year. Due to the fact that charitable deductions are limited to 30-50% of AGI (Adjusted Gross Income), they end up with charitable deductions that they must carry forward. This carryforward typically expires after 5 years if it is not used; this lost opportunity for charitable families costs them taxes.

This situation may create an opportunity to convert a standard IRA to a Roth IRA without a tax liability by using the charitable carryforward deductions. These deductions can offset the tax on a Roth conversion. There are other types of carryforwards, excess deductions and tax credits that can help to offset the tax liability incurred through a Roth Conversion as well.

Families that are interested in engaging in planned giving through the use of a Donor Advised Fund, a charitable trust, and other giving options that allow you to take a deduction up front may also benefit. This type of charitable giving, when planned along side of a Roth Conversion, may allow families to make the most of their charitable giving. For folks that have considered the development of a charitable gift plan, this is a wonderful year to begin the planning process.

As tax laws change and taxes rise, opportunities to create these symbiotic relationships will be crucial to preserving your wealth and maximizing your giving. Don’t miss your chance to take advantage of this unique opportunity. Consult with the professionals that you trust including your CPA, attorney and financial planner in order to make the most of the Roth Conversion and your charitable giving.

Mar 25, 2010

Washington on the Fiduciary Standard: Consumers first, but not just yet.

Insurance companies and big brokerages wave their wallets in Washington and throw consumers under the bus! The “Restoring American Financial Stability Act of 2010” was passed on Monday by the Senate Committee on Banking, Housing, and Urban Affairs. The legislation left out a key detail. It allows financial salespeople to continue to put their own self interest and the good of their company above their clients.

Prior to the financial mess in 2008, the members of the Financial Planning Coalition began calling for a Fiduciary Standard for investment advisors and financial planners. This was met by major opposition from firms whose employees are commission based financial salesmen. The fiduciary standard would require these folks to act in the best interest of their clients at all times. Imagine that! Consumers deserve this basic protection.

Fiduciaries live up to a few simple standards:
  1. A client’s best interest is their first priority… By Federal Law.
  2. They seek the best investments and the best prices for their clients. When comparing equal investments, the one with the lowest fee is best for the client.
  3. Fiduciaries understand that they cannot control the market; instead they focus on providing impartial and unbiased consultative advice.
  4. Full disclosure of the fees they charge and the payments they accept. Consumers understand how their fiduciary advisor is paid. No hidden fees.
  5. Full disclosure of conflicts of interest. Consumers are fully aware of relationships that may benefit the advisor.
Although the terms of this legislation have been finalized, consumers can educate themselves on the fiduciary standard. The terms, “Fiduciary Financial Planner” & “Fiduciary Investment Advisor” should not be an oxy-moron. Professionals should always do what is in their client’s best interest…ALWAYS!

Mar 9, 2010

Poking Fun

I could not resist sharing this commercial from Scottrade. They are pushing their $7 trades and in the process, picking on Brokers (read financial salesman). I love the part in the very beginning where he stumbles over the client name, which is Doug. Later he looks through his crystal ball and says, "Our focus is on you Dan."

Scottrade is poking fun at the stereotype broker that most investors have gotten far too accustomed to. There are investors that enjoy reading the Wall Street Journal and keeping up with stocks and bonds. They are passionate about making sure their finances are in order. For these types of folks, Scottrade may offer some real benefits. There are other individuals that want a financial planner who will act as a Fiduciary and will offer a consultative approach, working with other trusted advisors to maximize their finances. To find a Certified Financial Planner (TM), visit

I will leave you with one more funny commercial:

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