Roth Conversion for 86-yr old?
I’m thinking of doing a Roth conversion of part of my 86-yr old mother’s TIRA and I’d really like to get some advice on whether this makes sense. She already has a Roth and this would add to it.
Some factors:
1. Longevity — My mother has vascular dementia, is visibly declining, and is not likely to live until 100.
2. Ability to pay taxes — No problem here. Money is available in her taxable account and will not impede her ability to pay for her care. For a few years now my mother has been cashing in some deferred assets (non-qualified annuity, EE/I bonds…) to pay the tax on them. A yearly allotment is built into her budget.
3. Ability to pay for care — No problem here. Her WR including the yearly extra taxes from #3 above is
Permalink Submitted by Alan Spross on Sun, 2010-03-21 21:56
Since your Mother will continue to have enough to meet her needs and I believe you have factored in the high cost of care for dementia in view of the CC community, a conservative approach to incremental conversions makes sense for the benefit of later generations.
It also sounds like her beneficiaries as a whole are financially secure and would benefit from inheriting somewhat less in a Roth IRA than they otherwise would in TIRA assets. Also sound like there would be no particular need for beneficiaries to take out more than their RMDs, and that would allow time for the Roth to generate tax free earnings. You are correct regarding the taxation rules upon distribution of the Roth.
You did not indicate a target % for Roth vrs TIRA assets, but the first dollars allocated to a Roth are worth more than those when the Roth % grows because the marginal rate for the TIRA RMDs and distributions reduces as the year end values decline. One major issue is how much needs to be paid for what would be fully deductible nursing or dementia care and how the equity in the CC community would be applied. The balance sheet for the community and the presence of any bonding protection should also be considered. There should be enough left in the TIRA to withdrawal for these projected costs, where the IRS would pay the taxes by way of the medical deduction instead of having to use Roth assets that have already been taxed.
Even if there is a VAT, at that point it would likely occur after regular income tax rates had already been raised and would be in lieu of yet further income tax increases. In that event, a VAT would devalue the Roth somewhat and save further tax loss on the TIRA due to higher ordinary tax rates. Of course, conversions may also have some savings re any state estate or inheritance taxes or if the federal estate tax comes back with a lower unified credit than pundits expect.
So in summary, a measured approach to conversions does make sense, keeping the annual amount of them from inflating the current year’s bracket too much. Doing them annually, she would probably opt out of the two year deferral for 2010 conversion income so that the 2010 bracket would be utilized.
Permalink Submitted by Joy Dorman on Sun, 2010-03-21 22:15
Thanks, I hadn’t really thought about the deductible nature of her nursing care expenses once she moves to a memory unit. She has significant non-qualified tax-deferred annuity assets with a low basis that would be used to supplement to her income to cover several years of nursing home expenses even with inflated nursing home costs. I think her much smaller TIRA shouldn’t be needed.
Permalink Submitted by Edward Czapor on Mon, 2010-03-22 02:39
You stated that your mother already has a Roth. If this Roth has been established for at least 5 years, then all distributions to beneficiaries would be qualified, including any from contemplated conversions. If so, then earnings would be tax free even if withdrawn from conversions within 5 years of conversion.