@debrazebra I have not thought about using money in a regular IRA account to get tax benefits from paying for long-term care expenses. I assume you mean all tax deductible medical expenses. So of course I did a little research. This link provides an overview on how tax deductibility works:
https://www.aplaceformom.com/caregiver-resources/articles/is-home-care-tax-deductible
- Calculate your qualifying home care expenses. Figure out what portion of your total annual home care expenses qualifies as deductible medical expenses.
- Determine your adjusted gross income (AGI). Your AGI is less than your gross income and takes into account other adjustments, such as contributions you make to a retirement account.
- Calculate your medical expense threshold. Multiply your adjusted gross income by 7.5%. According to the IRS, only medical expenses that exceed 7.5% of your AGI are eligible for a tax deduction.
- Subtract your medical expense threshold from your qualifying home care expenses. The result is your final deduction. Keep in mind that any other unreimbursed qualifying medical expenses you pay for yourself, your dependents, and any qualifying relatives can increase your deduction further.
This subject can get complicated quickly. By long-term care expenses do you mean long term care insurance premiums, in-home care not covered by insurance, general medical expenses not covered by insurance, etc. Here is another link on long term care Ins deductibility: https://accountinginsights.org/are-long-term-care-premiums-tax-deductible-how-to-claim-them/
In terms of having too much in your Roth IRA which may result in you not being able to use tax deductions from your regular IRA, some additional things to keep in mind;
In order to use a tax deduction, you need to have a tax liability. As retirees get older, they tend to speed less money, so you will likely be taking less out of your retirement accounts. So the money you take out of your reg IRA may not result in you owing much in taxes.
Second, how much out of pocket in medical expenses will you really need to cover? If you have Medicare plus a medigap policy, your out of pocket expenses will likely be fairly low. I am not as up on Medicare Advantage plans, but there again how big could your out of pocket costs could there be? Possible exceptions to limited costs would be high costs for in-home care and long term care Ins premiums.
So bottom line is I don't think it is possible to be over-converted in Roth unless you are really really sure you are going to be in a lower tax bracket in the near future then you are in now, which again I think is very unlikely. Does that help??
I have not thought about using money in a regular IRA account to get tax benefits from paying for long-term care expenses. I assume you mean all tax deductible medical expenses.
I've seen threads on the Boglehead forum that talk about parents in assisted living who can't perform 2 (might be 3) ADL's (activities of daily living). Once that threshold is reached and I believe if a doctor attests to that, then all of the services that assist those ADL's become tax deductible, of course within the constraints you outlined above. I believe the same would be true of in-home care. And apparently there are situations where if the person is living in the residential care because of their medical condition, then even the rent would be deductible. That's all I can state off the top of my head.
So being one of those people who likes to know things, and then run scenarios about those things, I thought it would be clever to keep some amount of money in the IRA. However, I think I've gone past the point of that, and honestly, it's not a giant concern. But I'm adding this info here in case it helps someone else.
Have you preferentially put your bonds & CDs into your tax deferred account? If not, that is good way to slow the growth of tax deferred and so reduces the need for Roth Conversions. It is tax more tax efficient than keeping such things in taxable since the primary way bonds make gains is via dividends taxed as ordinary income. Keeping them in tax deferred matches their taxation with the taxation of the account, leaving more space in taxable/Roth for stocks. In taxable, the primary way of making gains will be taxed as long term capital gains.
While we cannot know our fate, you can model a case of withdrawing more money from tax deferred in the event of long term care. Under Expenses-Long Term Care, you can set the years, amounts and rate of cost increase. The you can use the Scheduled Withdrawals table to do extra withdrawals from tax deferred during those years and see how that impacts you. Roughly speaking, if your income from all sources (SS, pension, dividends, RMDS, etc.) does not use up the medical deduction, then there's an obvious benefit to withdrawing more from tax deferred to use the deduction. Once you use up the deduction, then additional IRA withdrawals do a little bit more good in our case, but not a big deal.
@ricke Yes, I did that about 5 years ago. Before my husband's death, we had the bulk of our retirement savings in tax deferred, probably 80% of the total. After his death, life insurance, sale of the house and moving, things changed quite a bit. Roth conversions were never in the picture before, because the plan was we were both going to work until 70, probably taking his SS earlier since we were roughly equal earners. I got lots of good advice, learned to change the asset location of the portfolio and start figuring out how to use these years of a lower SS survivors benefit before I turn 70 to Roth convert.
Now that I've confirmed my decision about how to do the Roth conversions, I will change the Pralana settings to match my actual portfolio (instead of having all the accounts set to the same AA), and start to model things like high expenses at end of life, a hit to SS, etc. I've done it before and it turns out fine, but I'm really enjoying the clarity and ease of use of Pralana Online. So nice to be able to see the final outcomes of 3 scenarios just by mousing over at the upper right. I see your point about using up the deduction, should I have one, by withdrawing more. However, it looks like the tax deferred will be empty long before I hit the point of needing that type of care, if ever. And my house is the final LTC insurance.
Getting a little off track with the title of this thread (what's new 😏) but sticking with the general how to evaluate Roth conversions. I am finding the idea of using pre-tax (regular IRA) monies for healthcare tax deductions fascinating 🤓. Not at all sure how to evaluate it in PRC. Saving money by using tax breaks sounds good to me. But how do you compare saving money using pre-tax accounts vs doing Roth conversions? Lets assume that tax rates do indeed go up in say 10 years and you have increased healthcare costs. Your tax savings using pre-tax monies would be even greater. But you would have saved money via Roth conversions at todays great tax rates if you did that instead of leaving the money in tax-deferred, especially if the stock market continues its downward trend this year and then you convert. Of course, the down side to not converting is if you don't have increased long-term care costs, you will be sacked with higher tax bills when you do pull the money out of pre-tax accounts with no additional deductions. What to do?? I have no idea. Thought?? 🧐
Getting a little off track with the title of this thread (what's new 😏) but sticking with the general how to evaluate Roth conversions. I am finding the idea of using pre-tax (regular IRA) monies for healthcare tax deductions fascinating 🤓. Not at all sure how to evaluate it in PRC. Saving money by using tax breaks sounds good to me. But how do you compare saving money using pre-tax accounts vs doing Roth conversions? Lets assume that tax rates do indeed go up in say 10 years and you have increased healthcare costs. Your tax savings using pre-tax monies would be even greater. But you would have saved money via Roth conversions at todays great tax rates if you did that instead of leaving the money in tax-deferred, especially if the stock market continues its downward trend this year and then you convert. Of course, the down side to not converting is if you don't have increased long-term care costs, you will be sacked with higher tax bills when you do pull the money out of pre-tax accounts with no additional deductions. What to do?? I have no idea. Thought?? 🧐
I inadvertently hijacked this thread, so blame me. You are right that the variable is would you ever need this deduction, and for how long? In dealing with my 93 year old mom who is in assisted living, even though she needs some help, technically I don’t see that she qualifies for being unable to perform 2 ADLs (activities of daily living), and may not hit that until the very end of her life.
So much of financial decision making, and life in general , is which mistake would I rather make? In my situation, with lots of good advice from Bogleheads, I went from facing a future tax bomb at RMD time and therefore changing asset locations, to now realizing that tax deferred will be drained probably in my 80s. So no LTC tax deductions for me. Oh well. But I think it is a worthwhile scenario, to see if one can hit extreme old age with a certain amount still left in tax deferred.
Not sure I understand why your tax deferred will go to zero unless you pull money out above and beyond RMDs. The RMD formulas take an increasing fraction of the balance each year, so the balance will go down by your mid-late 80's, but RMDs alone can't zero it out (unless it was inherited from someone other than a spouse).
Not sure I understand why your tax deferred will go to zero unless you pull money out above and beyond RMDs. The RMD formulas take an increasing fraction of the balance each year, so the balance will go down by your mid-late 80's, but RMDs alone can't zero it out (unless it was inherited from someone other than a spouse).
Because I didn’t have a lot in taxable to begin with, it will run out in a few years, more quickly because of the Roth conversion taxes. So next in order is the tax deferred, and eventually I will be only have the Roth. I know one of the goals is to smooth taxes over the years, but it seems that I end up with a much better EOLSV with this sort of plan, using more than one tool to test assumptions. It makes intuitive sense to me, because I believe taxes will go higher over the test of my life. So that is why tax deferred will indeed run out.
