Roth IRA conversion and RMDs
 

Here is a question/situation that I have not seen discussed. There are a lot of very knowledgeable people, so I am looking for thoughts, insights, concerns on the following:

Person is approaching 70 and will need to make RMDs in the next year or so.
A back of the envelope shows $XXX thousands of dollars in additional taxes if the government suggested RMD is followed to the expected lifespan. On the other hand if the ENTIRE amount of the qualified funds are converted in 1 year, the tax is well below 50% of the total for the 25 or 30 years of yearly RMDs.
So here are may thoughts:
1. Making the conversion all at once results in one very big tax bill (not sure if this can be spread over 2 or 3 years??), but after that NO taxes on the Roth withdrawals.
2. Not sure how long it will take to make up the large tax bill from the remaining investments. I need to do more modeling on this.
3. Still working on yearly cash-flow cases, normal RMD versus baying all at once.

I would love to hear others ideas on doing this (good/bad idea), other possible gotchas with this approach.

I will, of course, be discussing with my financial advisor, my tax advisor, etc. I think this will be an interesting discussions as I am sure that I am missing something. Thanks for your comments in advance.

Keep in mind that as income increases above defined thresholds, the amount you pay for Part B increases significantly, if that’s important to you.

I think there are just too many unknowns and variables on this to make a definitive decision. Some of these are your life span, the rate of return on future investments, and future tax rates. But, one thing to consider is that doing a Roth conversion will allow you to leave tax free money to your heirs. However, another thing is that, if you ever need assisted living, nursing care, or other long term care, the tax deferred money can be used on a tax free basis because it is tax deductible. For example, if you are spending $90K per year in a nursing home, the entire amount is tax deductible and that is the time to spend tax deferred money, if you have it. Personally, I do not plan to do any Roth conversions and to delay taxes for as long as possible. It may feel good and make life simple, but I don't think you will come out ahead if you convert all of your tax deferred money to a Roth.

retired guy, I was not aware that nursing home costs were entirely deductible with tax deferred money. Did this provision remain in the new tax bill?

It is my understanding that the new tax law maintains the medical expense deduction for 2 years for expenses in excess of 7.5 percent of income and in excess of 10 percent of income after 2 years. I believe that nursing home costs are considered medical expenses. Also, a large part of assisted living costs are also deductible, but not at 100 percent.

Thanks for your input. IMHO that would appear to greatly influence the Roth conversion decision.

This post is confusing. It seems to imply that the RMD is tax-free if used for specific medical care.

This is not true. Maybe jojo and I have misunderstood.

The only time the RMD is tax-free is if it is donated to a qualified charity. Here is what Vanguard has to say: Taxation of required minimum distributions | Vanguard

My point is that, if you have money in a tax deferred account, and you incur large medical expenses during the year, you can withdraw as much money as you want and take a tax deduction for medical expenses. So, if your taxable income is $60,000, but you have $90,000 of deductible medical expenses, you can withdraw $30,000 from a traditional IRA in the same year and owe no income tax for the year. The amount you withdraw can be larger than the RMD to take full advantage of a medical deduction. The idea is to time your IRA withdrawals to take advantage of the itemized medical deductions.

The RMD, as well as traditional IRA withdrawals, are treated as ordinary income. I think Rg is referring to the fact that certain medical expenses are deductible within defined limits (if/when you itemize deductions). So, if you are able to itemize medical deductions, you may, in effect, recoup some of the tax you would otherwise pay on such withdrawals.

It’s a bit of a long shot, particularly with the new higher standard deduction, but it might make a case for tax diversification, i.e., some $ in traditional and some $ in Roth.

Unfortunately, we can’t predict the future.

Sorry, I think we were typing at the same time.

I would suggest getting professional advice on the nursing home cost deductibility .......... not seeing facts so far.

It is. See IRS Pub. 502 @ irs dot gov

If medical reasons, not personal reasons and the adjustment relating to AGI.

Hate when facts get in the way.

Does anyone go to a nursing home if not for a medical reason? They won’t take you if not medically qualified. Sorry, I don’t understand.

Back to my original question(s). I am looking for potential gotchas with doing the conversion in one year versus taking RMDs over 25 years or so. I agree the impact on Social Security (medicare) payments was not something I had thought about, a BIG thank you. So looking for any others.
Lets keep up the discussion as I am sure there will be others interested. As I mentioned before, all of this discussion will become questions for the tax and financial planning advisors.