The general consensus regarding traditional IRAs is to not take withdrawals out of your traditional IRA because you’ll have to pay taxes on it. Let the assets in your traditional IRA proceed to grow tax-free and take withdrawals based on the minimum distribution rules (RMDs) required by the IRS. Another strategy is to convert your traditional IRA to a Roth IRA. This is a hot topic and there may be a variety of information available today from advisors and from the web related to a Roth conversion.
There are many good reasons for a Roth conversion. These reasons include:
- Minimizing income tax
- Possible lower tax rates in the longer term
- No required minimum distributions
- Tax-free growth
This article will take a look at it from a special angle. I need to propose the concept of ​​not converting, partially converting, or fully converting your traditional IRA to a Roth IRA, going against conventional wisdom. Granted, this strategy has to suit into your overall retirement and financial planning, but I feel it’s an option you must consider.
People reside longer today for a lot of reasons, including modern medical care. It is estimated that only 5% to 7% of individuals today have long-term care insurance. The cost of an assisted living facility can range from $10,000 to $15,000 monthly, depending on where you reside. Since only a few people have long-term care insurance, how do they pay for assisted living? Most people pay for it with taxed dollars, often from a savings account. The reason for that is that they don’t need to take the cash out of their traditional IRA because they’ve been programmed to pay taxes on that withdrawal. And they’re absolutely right!
What they do not learn is that assisted living payments also include a medical tax deduction. With that in mind, you should not pay for assisted living costs with taxed dollars; you must pay with taxed dollars.
To make it easy and never over-complicated, to illustrate your annual assisted living expenses are $100,000. Now let’s also say you will have no other income and you are not paying this out of your savings account but out of your traditional IRA. You now have $100,000 in taxable income, but you furthermore mght have a medical tax deduction of $92,500. Also, to illustrate you will have $10,000 in property taxes and no mortgage interest deduction because your property is debt-free. Surprise, due to these tax deductions, you made a taxable transaction, tax-free, your taxable income is zero.
I didn’t mention charitable deductions as an itemized deduction because those must also be deducted out of your traditional IRA as a QCD qualified charitable deduction on to the charity. This is a deduction for calculating your adjusted gross income.
If there may be money left in your traditional IRA whenever you die and your spouse can also be deceased, you may leave the cash to someone who will not be your spouse, often your kids. They must arrange an “Inherited IRA” account. The excellent news is that due to SECURE Act, they have to withdraw all funds inside 10 years of the date of your death.
While a ROTH conversion of any amount could be a particularly useful gizmo for minimizing your tax liability and supplementing your financial and retirement planning, I hope this text provides you with a special perspective on ROTH conversions.
