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  #1  
Old 11-12-2019, 08:49 AM
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RedChariot RedChariot is offline
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Default What do you think

It's that time. I must start to take the RMD. We don't need the additional income yet. Both have defined pensions and Social Security. My options seem to be take the money and place into a taxable fund or withdraw and place in Roth account. CFP states I have to take a large tax hit, but never pay tax again if I transfer to the Roth. It will sit there and grow. CFP is trustworthy and has proven this over the years. Looking to see if others have done the Roth conversion from a traditional IRA. THANKS.
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  #2  
Old 11-12-2019, 09:06 AM
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retiredguy123 retiredguy123 is offline
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Just to clarify, you cannot withdraw RMD money and put it into a ROTH. But, you can use other retirement money and do a ROTH conversion, but that will mean paying more taxes above the taxes you owe on the RMD money. For example, if your retirement account has $100,000, and you need to withdraw $5,000 in RMD, then only the $95,000 still in the account would be eligible to convert to a ROTH. The $5,000 RMD withdrawal is taxable and cannot be deposited into a ROTH or any other retirement account. In my opinion, it is not a good idea to do a ROTH conversion that will increase your tax bill.
  #3  
Old 11-12-2019, 09:14 AM
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I converted one traditional IRA to a Roth IRA. I was not pleased with the outcome - "take a large tax hit" was the reason.

My opinion is I would rather pay annual taxes on smaller amounts - hence lower tax bracket - than the one-time tax on a larger amount - assuming a higher tax bracket.

I have a second traditional IRA that I am leaving as is. Like you, I don't need the RMD now. I decided that I will use the RMDs to fund 529 accounts for the grand kids for as long as I can.

There is no clear-cut right answer. It's personal. Good luck with your decision.
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Old 11-12-2019, 09:18 AM
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collie1228 collie1228 is offline
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It all depends on your personal tax situation - I too have a near term RMD coming up, and in my situation, the RMD is going to drive me into a higher tax bracket, but there is really nothing I can do to reduce that - a Roth conversion would simply further drive up my tax bill. I'm just going to bite the bullet, take the annual RMD and send most of it to my kids in the form of a gift, and ask them to be prudent with it. I can't see where I can do anything else.
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Old 11-12-2019, 02:04 PM
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RedChariot RedChariot is offline
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Thank you for your response.
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  #6  
Old 11-12-2019, 02:49 PM
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15 years ago, well before I started to take SS, my income took a huge one time hit in a single tax year. I chose to convert my IRA to a ROTH that year as it was the only chance I would ever have and due to my situation the tax bill was not all that bad. I am very glad I did it but my circumstances at the time were an anomaly.
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All I can say is do the math and of course consult with your accountant, financial advisor or other financially knowledgable source first.
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  #7  
Old 11-12-2019, 04:46 PM
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Did your CFP tell you about IRMAA? (Income Related Monthly Adjusted Amount):

When recipients of Medicare have an AGI that crosses certain thresholds, the government adds extra charges to Medicare premiums. The hit comes two years after the tax filing. For a couple, filing jointly, those AGI thresholds have been starting at $170,000. I realize most retirement incomes do not cross into such amounts, but a big RMD in one year could throw some taxpayers into paying a lot more for Medicare, if they are not aware of this possibility and take out a big chunk of change with a willingness to take a tax hit but without having all the pieces of the puzzle.

Also, do you know about the QCD? (Qualified Charitable Distribution). If you are charitably inclined and have reached RMD age, you might look into using a QCD. The contribution must go directly to a qualified charity. It cannot go to a donor-advised fund. The QCD became a permanent part of the tax law in 2015. It was around before that, but Congress would decide to do it from year to year and often last minute which made tax planning harder.

Part of the beauty of a QCD is that it counts toward the RMD but incurs absolutely no income tax because the amount of the QCD never appears as part of the AGI. But the guidelines must be followed perfectly with good record keeping. Also, a QCD could come in handy to stay under those Medicare premium thresholds while meeting an RMD requirement that could throw you over.

As I understand a Roth Conversion, the amount transferred can be done only after the RMD required amount has been met.

If any of this info interests you as you plan for your RMD, you can find lots of info with a Googling, or of course, with a tax accountant.

I know. I sound like I just gave you a homework assignment. (But please keep in mind that I am not a CPA or CFP or anything of the sort so please do your homework.)

Last edited by Boomer; 11-12-2019 at 04:56 PM.
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Old 11-12-2019, 05:06 PM
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Another potential advantage to not doing a ROTH conversion is that you can reserve the taxable account to pay for a future large medical expense, such as an out-of-pocket assisted living or nursing home stay. You can withdraw taxable retirement money for the medical expense and take a medical tax deduction in that year or years and avoid the income tax.
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Old 11-12-2019, 07:03 PM
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Boomer Boomer is offline
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Another potential advantage to not doing a ROTH conversion is that you can reserve the taxable account to pay for a future large medical expense, such as an out-of-pocket assisted living or nursing home stay. You can withdraw taxable retirement money for the medical expense and take a medical tax deduction in that year or years and avoid the income tax.

I am pretty sure that the medical deduction for 2019 will be only the amount that exceeds 10% of AGI. Under the new tax law, in 2017 and 2018, that amount was what exceeded 7.5 % of AGI. But now, two years later, that law is allowing the medical deduction only in the amount that exceeds 10% of AGI. The rest — no deduction.

As I am sure you know — if said taxable account is holding stocks that are sold to pay medical expenses and the stocks have increased in value from the cost basis, that is when the capital gains tax kicks in.

Soooooo, let’s say stocks are held inside a Roth and have increased beyond cost basis. When the need for the money arrives, the stocks then can be sold while still inside the Roth and then the cash can come out tax free.

A decision to convert to Roth has to play through different scenarios, all individually based It is definitely not a one-size- fits-all thing.

- - - -

Geez. Whatinthehellisthematterwithme? I find myself fascinated by conversations about taxes. I get pulled in on TOTV sometimes, but I try hard to resist doing this in my real life. But (sigh) that does not always work. I think I bored the hell out of some friends at a dinner party last week when I went waxing philosophic on the wonders of the QCD. I really must give myself a little credit though because I did stop when I saw one guest fall face down asleep in his stroganoff.
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Old 11-12-2019, 07:22 PM
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rufflesmom rufflesmom is offline
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Originally Posted by Boomer View Post

Geez. Whatinthehellisthematterwithme? I find myself fascinated by conversations about taxes. I get pulled in on TOTV sometimes, but I try hard to resist doing this in my real life. But (sigh) that does not always work. I think I bored the hell out of some friends at a dinner party last week when I went waxing philosophic on the wonders of the QCD. I really must give myself a little credit though because I did stop when I saw one guest fall face down asleep in his stroganoff.
  #11  
Old 11-12-2019, 08:01 PM
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retiredguy123 retiredguy123 is offline
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Originally Posted by Boomer View Post
I am pretty sure that the medical deduction for 2019 will be only the amount that exceeds 10% of AGI. Under the new tax law, in 2017 and 2018, that amount was what exceeded 7.5 % of AGI. But now, two years later, that law is allowing the medical deduction only in the amount that exceeds 10% of AGI. The rest — no deduction.

As I am sure you know — if said taxable account is holding stocks that are sold to pay medical expenses and the stocks have increased in value from the cost basis, that is when the capital gains tax kicks in.

Soooooo, let’s say stocks are held inside a Roth and have increased beyond cost basis. When the need for the money arrives, the stocks then can be sold while still inside the Roth and then the cash can come out tax free.

A decision to convert to Roth has to play through different scenarios, all individually based It is definitely not a one-size- fits-all thing.

- - - -

Geez. Whatinthehellisthematterwithme? I find myself fascinated by conversations about taxes. I get pulled in on TOTV sometimes, but I try hard to resist doing this in my real life. But (sigh) that does not always work. I think I bored the hell out of some friends at a dinner party last week when I went waxing philosophic on the wonders of the QCD. I really must give myself a little credit though because I did stop when I saw one guest fall face down asleep in his stroganoff.
The capital gains rate does not apply when you withdraw money from a retirement account, because the income is all taxed as ordinary income. You are correct that the medical deduction does not kick in until your medical expenses exceed 10 percent of your AGI. But, if you spend a few months in a nursing home, you can run up a bill of tens of thousands of dollars, and all of that qualifies as medical expenses. Also, if you are in assisted living, most of the cost (about 60 percent) will qualify as a medical deduction.
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Old 11-12-2019, 08:29 PM
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Originally Posted by retiredguy123 View Post
The capital gains rate does not apply when you withdraw money from a retirement account, because the income is all taxed as ordinary income. You are correct that the medical deduction does not kick in until your medical expenses exceed 10 percent of your AGI. But, if you spend a few months in a nursing home, you can run up a bill of tens of thousands of dollars, and all of that qualifies as medical expenses. Also, if you are in assisted living, most of the cost (about 60 percent) will qualify as a medical deduction.
rg, I understand that about ordinary income tax. But in paragraph 2 of my quote I was talking about cap gains on a taxable account stock sale.

Hey, maybe you can answer this question for me about Roth conversions. Can stocks be transferred in-kind from a traditional IRA to a Roth if the ordinary income tax is paid on the face value of the stock at the time of the transfer?

Btw, I think converting, once in a while, on the way to 70 and 1/2 can work out as a good option if the tax year projection is shaking out to make sense to do it while you can.

And you are absolutely right about how quickly costs of nursing home and long care can pile up. But it would still be better if they had left the in excess of AGI percentage at 7.5%. Actually, I am pretty sure that just before the tax law changed, it was 10% except for those over 65 — who got 7.5%. Too bad they could not have left that age 65 thing alone.
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Old 11-12-2019, 09:03 PM
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rg, I understand that about ordinary income tax. But in paragraph 2 of my quote I was talking about cap gains on a taxable account stock sale.

Hey, maybe you can answer this question for me about Roth conversions. Can stocks be transferred in-kind from a traditional IRA to a Roth if the ordinary income tax is paid on the face value of the stock at the time of the transfer?

Btw, I think converting, once in a while, on the way to 70 and 1/2 can work out as a good option if the tax year projection is shaking out to make sense to do it while you can.

And you are absolutely right about how quickly costs of nursing home and long care can pile up. But it would still be better if they had left the in excess of AGI percentage at 7.5%. Actually, I am pretty sure that just before the tax law changed, it was 10% except for those over 65 — who got 7.5%. Too bad they could not have left that age 65 thing alone.
Yes, you can do a ROTH conversion of in-kind stocks from a traditional IRA, and pay income tax on the value of the stock. Personally, I don't think it is a good idea to do ROTH conversions in most cases. But, I did have a friend who converted all of his traditional IRA to a ROTH over a period of years. His reasoning was that he wanted his children to inherit his money with no tax hassles and no tax liability. This made sense to me because an inherited taxable IRA is very complicated to deal with, whereas a ROTH presents no problem for your children. By the way, you can thank the ACA law for the 10 percent medical deduction rule. It was one way to fund the bill.
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Old 11-13-2019, 09:47 AM
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The Qualified Charitable Donation can be a valuable way to manage this situation. The funds have to go directly to the charity. This will satisfy the Required Minimum Distribution, not affect your Adjusted Gross Income (thus avoiding taxes and possible Medicare premium increases) and also support a cause that is important to you.

If you support your church with monthly contributions, or your church's building fund, you can pay the entire year's obligation with this one transfer.
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Old 11-13-2019, 11:59 AM
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Originally Posted by retiredguy123 View Post
Yes, you can do a ROTH conversion of in-kind stocks from a traditional IRA, and pay income tax on the value of the stock. Personally, I don't think it is a good idea to do ROTH conversions in most cases. But, I did have a friend who converted all of his traditional IRA to a ROTH over a period of years. His reasoning was that he wanted his children to inherit his money with no tax hassles and no tax liability. This made sense to me because an inherited taxable IRA is very complicated to deal with, whereas a ROTH presents no problem for your children. By the way, you can thank the ACA law for the 10 percent medical deduction rule. It was one way to fund the bill.

Darn it, rg123, we were having a fine conversation and then you had to go all tribal on me.

I could respond by saying that I do not agree with your theory. I could go on to point out that it looks to me like a chunk of change from the tax law is in the hands of corporate CEOs who too often choose to drive much of it into stock buybacks to inflate share price.

I realize the fact that I do not like the top-heavy use of a lot of that money makes me a bit of an enigma, to some, because I have an interest in the market.

Oh well, rg, it was fun to discuss a little econ with you, but then you decided to try to take me down that road to nowhere. It would be a waste of time for both of us.

Last edited by Boomer; 11-13-2019 at 01:00 PM. Reason: Needed a proofreading
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