Not much point in Roth conversions?

[skipro33]

I have no intention of converting to Roth or pay any taxes until I am forced into paying. Regarding a surviving spouse and higher single rate compared to married, there is also the loss to social security. Rough numbers show the loss of around $2000 a month from SS to the family income way more than offsets the increase in single tax rates.

 

[JDARNELL]

Roth Conversions is now my favorite topic taking the place of the pay Orr mortgage vs invest debate. I have run our Roth Conversion numbers on our large traditional IRA up through the 22% bracket. Being in our mid 50s the impact of the conversion does help the surviving spouse's income bracket but does minimal for terminal portfolio value. I think it's splitting hairs in the out years. In the short-term up to and past RMD mandatory dates it's worse off.

 

[Exchme]

Roth Conversions is now my favorite topic taking the place of the pay Orr mortgage vs invest debate. I have run our Roth Conversion numbers on our large traditional IRA up through the 22% bracket. Being in our mid 50s the impact of the conversion does help the surviving spouse's income bracket but does minimal for terminal portfolio value. I think it's splitting hairs in the out years. In the short-term up to and past RMD mandatory dates it's worse off.

When you or your heirs go to get the money out of a tax deferred account, taxes are owed. So unless the money will be given to a charity, you should make an estimate of the tax burden that will be applied to the residual. Life goes in unexpected directions so you may need to withdraw more than you think or when your heirs withdraw it, they will owe the tax.

Roth math often depends on the nuances of the tax code - maximizing ACA premium credits, avoiding the LTCG tax phase-in, avoiding IRMAA fees, minimizing taxes on SS benefits, beating the clock before TCJA expires, etc. There are pre-built programs where the authors have spent untold hours toiling over the tax code to program that stuff in, I recommend using one of those rather than try to program all that yourself. (Bogleheads.org's Retiree Portfolio Model (free spreadsheet) and Pralana Gold (paid) are both good, I've seen others discuss other tools as well.)

Another major planning factor to consider is the possible need for Long Term Care. Some folks go overboard with Roth Conversions, but it's generally a good idea to leave some money in tax deferred because long term care expenses can be tax deductible. It would be bad to have pre-paid taxes doing Roth Conversions if you actually ended up needing care that could have been paid for using IRA money and a (nearly) offsetting tax deduction.

 

[Rianne]

When you or your heirs go to get the money out of a tax deferred account, taxes are owed. So unless the money will be given to a charity, you should make an estimate of the tax burden that will be applied to the residual. Life goes in unexpected directions so you may need to withdraw more than you think or when your heirs withdraw it, they will owe the tax.

Roth math often depends on the nuances of the tax code - maximizing ACA premium credits, avoiding the LTCG tax phase-in, avoiding IRMAA fees, minimizing taxes on SS benefits, beating the clock before TCJA expires, etc. There are pre-built programs where the authors have spent untold hours toiling over the tax code to program that stuff in, I recommend using one of those rather than try to program all that yourself. (Bogleheads.org's Retiree Portfolio Model (free spreadsheet) and Pralana Gold (paid) are both good, I've seen others discuss other tools as well.)

Another major planning factor to consider is the possible need for Long Term Care. Some folks go overboard with Roth Conversions, but it's generally a good idea to leave some money in tax deferred because long term care expenses can be tax deductible. It would be bad to have pre-paid taxes doing Roth Conversions if you actually ended up needing care that could have been paid for using IRA money and a (nearly) offsetting tax deduction.

That's a great point I didn't think of. Are moving to independent living with medical considered long-term care? Or do you have to be in a nursing home?

 

[SevenUp]

That's a great point I didn't think of. Are moving to independent living with medical considered long-term care? Or do you have to be in a nursing home?

What matters is the primary reason for moving there. If medical, all costs are deductible. Otherwise, only specific medical costs are deductible.

 

[ChrisC]

That's a great point I didn't think of. Are moving to independent living with medical considered long-term care? Or do you have to be in a nursing home?

Moving into a CCRC in some cases can result in medical expense deduction allowances. The extra-large entrance fee for a Type A contract could yield a significant portion of it to be a qualified medical expense for medical deduction purposes, even if you're in the independent living wing of the CCRC. And I think a portion of your monthly maintenance fees, even if in the independent living wing, can likewise qualify as a prepaid medical expense. Of course, if you navigate into assisted living or skilled nursing care, and you meet IRS medical expense criteria for medical deductions for LTC, then basically all of your monthly maintenance fees for that care (regardless of the contract type of the CCRC) should qualify as a medical expense deduction.

Here is some literature about this.

2023 Continuing Care Retirement Community Tax Deduction

Discover how Riddle Village's Continuing Care Retirement Community can offer tax deductions on entry and monthly fees, enhancing your retirement savings.

www.riddlevillage.com

Tax Reform & CCRC Medical Deductions | Bragg Financial

Many U.S. taxpayers are familiar with the medical expense tax deduction. Far fewer taxpayers realize […]

braggfinancial.com

Tax Court Rules on CCRC Residents&#39 Allowable Medical Deductions

The U.S. Tax Court rules that a couple residing in a continuing care retirement community (CCRC) may employ the percentage method in determining the ...

attorney.elderlawanswers.com

 

[RetiredHappy]

That's a great point I didn't think of. Are moving to independent living with medical considered long-term care? Or do you have to be in a nursing home?

Payments for in-home caregivers are also considered medical for IRS tax deductions purpose.

 

[Exchme]

That's a great point I didn't think of. Are moving to independent living with medical considered long-term care? Or do you have to be in a nursing home?

Independent Living would typically not be tax deductible, to get the tax deduction you have to have either severe cognitive impairment or be unable to do at least two ADLs (activities of daily living) for at least 90 days - ADLs are toileting, eating, bathing, transferring, dressing, continence. See IRS Pub 502.

Assisted living/memory care is hugely expensive and when we shopped LTC insurance policies, we felt like they were very unfavorable, so having the government share in the cost via tax deduction may be about the best you can do.

 

[Sunset]

Independent Living would typically not be tax deductible, to get the tax deduction you have to have either severe cognitive impairment or be unable to do at least two ADLs (activities of daily living) for at least 90 days - ADLs are toileting, eating, bathing, transferring, dressing, continence. See IRS Pub 502.

......

If I claim it and the IRS catches me at it, by the act of simply claiming it when I should not have, proves I have cognitive impairment

 

[Dash man]

Independent Living would typically not be tax deductible, to get the tax deduction you have to have either severe cognitive impairment or be unable to do at least two ADLs (activities of daily living) for at least 90 days - ADLs are toileting, eating, bathing, transferring, dressing, continence. See IRS Pub 502.

Assisted living/memory care is hugely expensive and when we shopped LTC insurance policies, we felt like they were very unfavorable, so having the government share in the cost via tax deduction may be about the best you can do.

Some independent living expenses can be deducted, such as medicine management. The key being it is directly medically related. Same with assisted living.

 

[SevenUp]

Independent Living would typically not be tax deductible, to get the tax deduction you have to have either severe cognitive impairment or be unable to do at least two ADLs (activities of daily living) for at least 90 days - ADLs are toileting, eating, bathing, transferring, dressing, continence. See IRS Pub 502.

The two activities of daily living qualification falls under "Long-Term Care".

The if a principal reason for being there is to get medical care qualification falls under "Nursing Home".

Make of that what you will.