IRA to Roth conversion now (age 68) or RMD?

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computerdoc
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IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Wed Sep 20, 2017 6:08 pm

I’m 68 this November 2017, and my wife will be 66 in January 2018. We are both delaying taking Social Security until 70, but we are grandfathered into file and suspend and she will be able to file for spousal benefits when she turns 66. Our gross income right now is from our pensions ($50,000 taxable yearly), my salary from a part-time business ($8,000 yearly) and rent for business use of part of our home ($1800 yearly). I may stop working at age 70 but I could easily continue at the pace I am now working and probably make about the same money.

We’re supplementing our income from withdrawals from our taxable and TIRA accounts each year, and that has pushed us up into the 25% federal tax bracket. I have a TIRA balance right now of $106,480 and my wife has one valued at $147,535. We also each have a Roth IRA that is over 5 years since inception. I have used Vanguard’s RMD calculator and it looks like my first RMD will be $4518 and hers will be $6347.

My question is this: is it worth it to begin to make partial IRA to Roth conversions prior to age 70 ½ and the RMD, holding them to the amount that will keep us in the 25% bracket? We don’t plan to use the money once our full Social Security kicks in, and by my calculation, in a worst (best?) case scenario, with full Social Security, added to our present incomes from pensions, both RMDs will still not push us out of the 25% bracket. I would expect we would probably just reinvest the money from the RMDs. I guess what makes me uneasy is incurring those big tax bills the next couple of years until the conversions are complete. But on the other hand, the taxes will have to be paid and we will not be in a lower tax bracket if we wait.
Your thoughts?

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patrick013
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by patrick013 » Wed Sep 20, 2017 7:20 pm

Married filing jointly has a 25% tax rate for AGI between
$75901 and $153100.

Equal tax rates have no effect on conversion returns except you pay the taxes
upfront, but your Roth will compound tax free. Also, each conversion starts a
new 5 year wait for withdrawals, the Roth 5 yr. rule. Keep your Roth invested.

So in a way it's a toss up, be aware of the 5 year rule, and it looks like you have
room in the 25% bracket where it seems like you're going to stay. You'll have
SS, less RMD's, and the Roth in reserve if you ever need it.
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Peter Foley
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by Peter Foley » Wed Sep 20, 2017 7:36 pm

I would do Roth conversion to the top of the 15% bracket at least this year. Probably a good idea until your RMD's start.

Your RMD's are not so large that they will present a tax burden. You could also consider converting one or both of your RMD's into a charitable contribution for the year.

Unless I've misread the rules, you do not have to worry about the 5 year rule after age 59.5. See below:

Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

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patrick013
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by patrick013 » Wed Sep 20, 2017 8:19 pm

Here's some added info for the 5 year rule.

https://www.irs.gov/publications/p590b/ch02.html
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computerdoc
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Wed Sep 20, 2017 9:07 pm

We withdrew some from our TIRA's this year to go play, so we're already in the 25% bracket for this year.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by kaneohe » Wed Sep 20, 2017 9:15 pm

Agree w/Peter Foley that after 59.5 y.o. and first Roth > 5 yrs old,OP doesn't have to worry about 5 yr rule on conversions. Even if Roth were not 5 yrs old , the ordering rules of contributions first, then conversions imply that unless OP withdraws everything at once, there likely will be no taxes/penalties on the initial amounts withdrawn since earnings come out last.

The kawill table makes things much simpler than the IRS publication and the table was blessed by Alan S. so that should give users more confidence.

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patrick013
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by patrick013 » Wed Sep 20, 2017 9:18 pm

computerdoc wrote:
Wed Sep 20, 2017 9:07 pm
We withdrew some from our TIRA's this year to go play, so we're already in the 25% bracket for this year.
As long as you stay at the marginal tax rate you estimated when 70 and
thereafter or a lesser tax rate for the conversions you're safe. If you
convert at a higher tax rate (would be 28%) then you lose some return.
age in bonds, buy-and-hold, 10 year business cycle

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by JW-Retired » Wed Sep 20, 2017 9:35 pm

computerdoc wrote:
Wed Sep 20, 2017 6:08 pm
My question is this: is it worth it to begin to make partial IRA to Roth conversions prior to age 70 ½ and the RMD, holding them to the amount that will keep us in the 25% bracket? We don’t plan to use the money once our full Social Security kicks in, and by my calculation, in a worst (best?) case scenario, with full Social Security, added to our present incomes from pensions, both RMDs will still not push us out of the 25% bracket.
You will have $50k pension, roughly $10k RMDs and how much SS when everything kicks in? We can't tell what the real marginal tax on your RMDs will be because it depends on whether on not the full 85% amount of SS taxation has been reached, which depends on the relative amounts of SS versus other income. Your real marginal tax on the RMDs could actually be 46.25%, not counting state tax. :shock:
see
viewtopic.php?f=2&t=177441#p2686058
and
https://www.bogleheads.org/wiki/Social_ ... calculator
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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Wed Sep 20, 2017 10:11 pm

computerdoc wrote:
Wed Sep 20, 2017 6:08 pm
I’m 68 this November 2017, and my wife will be 66 in January 2018. ...
Our gross income right now is from our pensions ($50,000 taxable yearly), my salary from a part-time business ($8,000 yearly) and rent for business use of part of our home ($1800 yearly). ...
We’re supplementing our income from withdrawals from our taxable and TIRA accounts each year, and that has pushed us up into the 25% federal tax bracket. ...
My question is this: is it worth it to begin to make partial IRA to Roth conversions prior to age 70 ½ and the RMD, holding them to the amount that will keep us in the 25% bracket? ...
Your thoughts?
Appears to be a large amount of tIRA withdrawals this year. Assuming the other numbers are as stated, and adding $1200 in qualified dividends/long term capital gains, it appears you've withdrawn >$40K:
Image

Add $36K/yr from SS benefits and you get
Image

See Tools and calculators - Personal_finance_toolbox - Bogleheads if you'd like to enter your own numbers and view the resulting charts.

Converting up to the end of the 15% rate but no higher, each year you can do so, is worth considering.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by JW-Retired » Thu Sep 21, 2017 7:57 am

computerdoc wrote:
Wed Sep 20, 2017 6:08 pm
I’m 68 this November 2017, and my wife will be 66 in January 2018. We are both delaying taking Social Security until 70, but we are grandfathered into file and suspend and she will be able to file for spousal benefits when she turns 66. Our gross income right now is from our pensions ($50,000 taxable yearly), my salary from a part-time business ($8,000 yearly) and rent for business use of part of our home ($1800 yearly). I may stop working at age 70 but I could easily continue at the pace I am now working and probably make about the same money.
Two things...
First, you fileing and suspending doesn't work anymore for her getting spousal. The new rules suspend everyone on your account when you suspend your own benefits, so doing it won't accomplish anything. She is grandfathered into being able to do a restricted filing for spousal benefits, but she will have to wait until you are 70 and taking SS yourself.

Second, I see no way to know what Roth conversions you should do now without knowing what your final SS benefits are going to be. (Also any other post age 70 income you may not have mentioned.)
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computerdoc
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Thu Sep 21, 2017 8:47 am

I'm sorry, but I may have not communicated my situation clearly. Regarding the file and suspend, I was at FRA by April 30, 2016 and was able to file and suspend before that date, so my wife will be able to file for a spousal benefit at her FRA. I expect my SS benefit to be about $33420 and my wife's to be $30264.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by JW-Retired » Thu Sep 21, 2017 9:00 am

computerdoc wrote:
Thu Sep 21, 2017 8:47 am
I'm sorry, but I may have not communicated my situation clearly. Regarding the file and suspend, I was at FRA by April 30, 2016 and was able to file and suspend before that date, so my wife will be able to file for a spousal benefit at her FRA.
Great planning!
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by JW-Retired » Thu Sep 21, 2017 9:33 am

computerdoc wrote:
Thu Sep 21, 2017 8:47 am
I expect my SS benefit to be about $33420 and my wife's to be $30264.
Looks like you will be in a super high tax situation for your RMD then. Suggest you run all your projected final income steams income through a tax calculator.

For example, I used https://www.hrblock.com/get-answers/tax ... e/aboutYou for the following:
$63,600 SS income, $50,000 pension, $10,000 RMD.... gives Federal tax = $12,400
$63,600 SS income, $50,000 pension, $9,000 RMD..... gives Federal tax = $11,938

This is a $462 difference, or a 46.2% effective Federal marginal tax on the RMD. Meaning reducing your RMDs by Roth conversions before you are taking SS looks very beneficial. But check this yourself and make sure you put in all incomes you might have.
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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Thu Sep 21, 2017 10:15 am

JW-Retired wrote:
Thu Sep 21, 2017 9:33 am
computerdoc wrote:
Thu Sep 21, 2017 8:47 am
I expect my SS benefit to be about $33420 and my wife's to be $30264.
Looks like you will be in a super high tax situation for your RMD then. Suggest you run all your projected final income steams income through a tax calculator.
+1

Adding that much SS to the situation in the previous charts gives the picture below. Individual circumstances do matter.
Image

SGM
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by SGM » Thu Sep 21, 2017 10:42 am

If you are going to be in the same or greater tax rate when you take RMDs it will pay to make Roth conversions. If you pay your taxes out of a taxable account the buying power at the time of conversion will be exactly the same. You don't lose any buying power period. In the 25% tax bracket you have the same buying power if you have $100k in a tIRA and $25k in taxable than if you had $100k in a Roth. It is better to think in terms of buying power. I only paid taxes for a conversion out of a taxable account.

Over time you will pay slightly less in taxes on dividends and interest in your taxable account since this is lower. You may pay lower Medicare premiums if you control your taxable income and RMDs after age 70 1/2. When one of you has to file as a widowed single your tax rates will likely go up.

There are issues concerning gifting tIRA RMDs after age 70 1/2 and paying less taxes if one of you goes into long term care. I don't have time to currently to go into the many nuances, but your personal case may be different. Good luck. Much of what I learned about conversions came from James Lange's book The Roth Revolution.

computerdoc
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Thu Sep 21, 2017 11:33 am

FiveK wrote:
Thu Sep 21, 2017 10:15 am
JW-Retired wrote:
Thu Sep 21, 2017 9:33 am
computerdoc wrote:
Thu Sep 21, 2017 8:47 am
I expect my SS benefit to be about $33420 and my wife's to be $30264.
Looks like you will be in a super high tax situation for your RMD then. Suggest you run all your projected final income steams income through a tax calculator.
+1

Adding that much SS to the situation in the previous charts gives the picture below. Individual circumstances do matter.
Image
What tool in the toolbox generates this graph? I’m not sure I understand what it is depicting.

computerdoc
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Thu Sep 21, 2017 11:35 am

All these comments have given me a lot to absorb. Thank you all so much!

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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Thu Sep 21, 2017 11:54 am

computerdoc wrote:
Thu Sep 21, 2017 11:33 am
FiveK wrote:
Thu Sep 21, 2017 10:15 am
JW-Retired wrote:
Thu Sep 21, 2017 9:33 am
computerdoc wrote:
Thu Sep 21, 2017 8:47 am
I expect my SS benefit to be about $33420 and my wife's to be $30264.
Looks like you will be in a super high tax situation for your RMD then. Suggest you run all your projected final income steams income through a tax calculator.
+1

Adding that much SS to the situation in the previous charts gives the picture below. Individual circumstances do matter.
<snip>
What tool in the toolbox generates this graph? I’m not sure I understand what it is depicting.
This one: Tools and calculators - Personal_finance_toolbox - Bogleheads. Note that the link takes you directly to the specific tool entry.

It's a spreadsheet. To open the spreadsheet directly in Google docs (from which it can be downloaded in Excel form), use https://drive.google.com/file/d/0B45krB ... p=sharing/.

See the Instructions tab, starting in row 15, for details on generating those graphs.

As used in this thread the charts depict the marginal tax rates incurred by tIRA withdrawals, holding other income (salary, pension, rent, dividends) constant. E.g., for the first chart in viewtopic.php?p=3541113#p3541113,
- the first ~$38K would incur a 15% tax
- the next $1.2K would incur a 30% tax as the extra income is taxed at 15% and moves an equal amount of dividends from 0% to 15% tax.
- the rest of the withdrawals would be taxed at 25%.
- the blue curve ("Cumulative") is the weighted average of all the individual marginal rates. E.g., withdrawing $75K would incur a total of 20%, or $15K, in tax.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by sandramjet » Thu Sep 21, 2017 2:01 pm

patrick013 wrote:
Wed Sep 20, 2017 7:20 pm
Married filing jointly has a 25% tax rate for AGI between
$75901 and $153100.
I thought brackets were based on taxable income, not AGI?

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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Thu Sep 21, 2017 2:03 pm

sandramjet wrote:
Thu Sep 21, 2017 2:01 pm
I thought brackets were based on taxable income, not AGI?
You thought correctly.

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patrick013
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by patrick013 » Thu Sep 21, 2017 2:16 pm

I thought we were in the 25% marginal tax bracket for the next 2
years and afterwards, after 70. If dropped into the 15% marginal
tax bracket presently conversions would be even better.
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patrick013
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by patrick013 » Thu Sep 21, 2017 2:27 pm

sandramjet wrote:
Thu Sep 21, 2017 2:01 pm
patrick013 wrote:
Wed Sep 20, 2017 7:20 pm
Married filing jointly has a 25% tax rate for AGI between
$75901 and $153100.
I thought brackets were based on taxable income, not AGI?
Need to adjust for a few more items then.

Adjusted gross income (AGI) is an individual's total gross income minus specific
deductions. Taxable income is AGI minus allowances for personal exemptions
and itemized deductions. The number before you apply the tax rate.
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Peter Foley
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by Peter Foley » Thu Sep 21, 2017 2:43 pm

computerdoc

One thing to keep in mind in terms of Roth conversions is unknown medical costs. Sorry to bring this up, but we are currently going though this with my mother-in-law. At age 96 she broke her hip, and has suffered a fairly rapid mental decline ever since. She has been in assisted living since January of this year and the costs of the assisted living exceed her income. So she will be in the zero tax bracket. Withdrawals from her tax deferred account will be tax free.

My conclusion is that it is not a bad idea to leave a couple years worth of assisted living costs in a tax deferred account. While markets vary a lot, assisted living with the level of care needed by my MIL is about $7,000/month.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by oldcomputerguy » Thu Sep 21, 2017 2:57 pm

Peter Foley wrote:
Wed Sep 20, 2017 7:36 pm
Unless I've misread the rules, you do not have to worry about the 5 year rule after age 59.5.
The IRS says that qualified distributions must meet two requirements: (1) five years have passed after the first contribution, and (2) the distribution is made after you reach age 59-1/2. Note that both conditions are in play. So yes, by this reading the five-year rule still applies after age 59-1/2.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Thu Sep 21, 2017 3:07 pm

oldcomputerguy wrote:
Thu Sep 21, 2017 2:57 pm
The IRS says....
Keep reading, to the first bullet point under "Exceptions":
Exceptions. You may not have to pay the 10% additional tax in the following situations.

You have reached age 59½.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by my name » Thu Sep 21, 2017 3:57 pm

Peter Foley wrote:
Thu Sep 21, 2017 2:43 pm
leave a couple years worth of assisted living costs in a tax deferred account.
Yes, that is what I myself have my deferred accounts for, self-insured for LTC. I can live off of SS and pension.

In NJ, skilled nursing is now about $165,000/year. Assisted Living and Memory Care about $120,000/year. One chain facility said their location in PA is half the cost. But they have no medicaid beds (state laws vary) should you run out of money. Each location has quirks that make decisions difficult.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by oldcomputerguy » Thu Sep 21, 2017 4:04 pm

FiveK wrote:
Thu Sep 21, 2017 3:07 pm
oldcomputerguy wrote:
Thu Sep 21, 2017 2:57 pm
The IRS says....
Keep reading, to the first bullet point under "Exceptions":
Exceptions. You may not have to pay the 10% additional tax in the following situations.

You have reached age 59½.
True. But look at Figure 2-1, a little further down, a flowchart showing whether or not the 10% penalty applies. In that flowchart, the question of whether or not one is age 59-1/2 is taken up after the question of the five-year time period. This seems to indicate pretty clearly that violating the five-year requirement results in penalties whether or not one has passed age 59-1/2.

I'm no lawyer, and I'll be the first to admit that I could be totally wrong, but if I am, then I'm really confused.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by computerdoc » Thu Sep 21, 2017 5:50 pm

Peter Foley wrote:
Thu Sep 21, 2017 2:43 pm
computerdoc

One thing to keep in mind in terms of Roth conversions is unknown medical costs. Sorry to bring this up, but we are currently going though this with my mother-in-law. At age 96 she broke her hip, and has suffered a fairly rapid mental decline ever since. She has been in assisted living since January of this year and the costs of the assisted living exceed her income. So she will be in the zero tax bracket. Withdrawals from her tax deferred account will be tax free.

My conclusion is that it is not a bad idea to leave a couple years worth of assisted living costs in a tax deferred account. While markets vary a lot, assisted living with the level of care needed by my MIL is about $7,000/month.
I'm missing something here. How is she in the zero tax bracket? How are the withdrawals from her tax deferred account tax free? Do the assisted living costs as tax deductions somehow zero out the taxes owed on the tax deferred withdrawals, which would be normally taxed at ordinary income?

Please excuse my ignorance and thanks in advance for enlightening me.

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Re: IRA to Roth conversion now (age 68) or RMD?

Post by Peter Foley » Thu Sep 21, 2017 8:36 pm

I'm reading from IRS Pub 13 of a couple years ago: Chapter 21 Medical Expenses you can include on Schedule A (Form 1040).

"Nursing Home. You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution for yourself, spouse, or your dependents. This includes the cost of meals and lodging in the home if the principal reason for being there is to get medical care."

So you do you taxes and itemize deductions for medical expenses that are more than 7.5% of your AGI if you are over the age of 65.

This, together with your other itemized deductions and personal exemptions would greatly reduce, if not eliminate your taxable income.

To verify this you might check the current year IRS Publication 502.

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FiveK
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Re: IRA to Roth conversion now (age 68) or RMD?

Post by FiveK » Thu Sep 21, 2017 9:55 pm

oldcomputerguy wrote:
Thu Sep 21, 2017 4:04 pm
FiveK wrote:
Thu Sep 21, 2017 3:07 pm
oldcomputerguy wrote:
Thu Sep 21, 2017 2:57 pm
The IRS says....
Keep reading, to the first bullet point under "Exceptions":
Exceptions. You may not have to pay the 10% additional tax in the following situations.

You have reached age 59½.
True. But look at Figure 2-1, a little further down, a flowchart showing whether or not the 10% penalty applies. In that flowchart, the question of whether or not one is age 59-1/2 is taken up after the question of the five-year time period. This seems to indicate pretty clearly that violating the five-year requirement results in penalties whether or not one has passed age 59-1/2.

I'm no lawyer, and I'll be the first to admit that I could be totally wrong, but if I am, then I'm really confused.
It is indeed not straightforward. Figure 2-1 is not a flowchart to determine whether a 10% penalty applies. It is a flowchart to determine whether you have a "qualified distribution".

Having a qualified distribution is sufficient to avoid the penalty.
Having a qualified distribution is not necessary to avoid the penalty if you fit one of the exceptions, e.g., >59½.

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