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Any downsides to a Roth conversion (nursing home stay ?)
Old 04-08-2015, 08:54 PM   #1
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Any downsides to a Roth conversion (nursing home stay ?)

Are there any reasons one would not want to do Roth conversions (inside the 15% tax bracket ?)

On instance I suppose would be if a person needed an extended nursing home stay ? If they funded this from a tIRA, all of the distribution would be a medical expense, deductible on taxes, and no or minimal tax paid.

If instead the person converted the tIRA to Roth, they'd have 15% less of money to spend on nursing home care.

Maybe that's too hypothetical or unlikely and the other reasons for conversion are more likely and worthwhile.

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Old 04-08-2015, 09:04 PM   #2
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If your effective tax rate will be lower later, such as due to increased deductions, then convert or draw from the tIRA at that time. The problem is no one knows exactly what his/her future tax rate will be, so the process involves making a best guess.

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Old 04-09-2015, 08:00 AM   #3
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If you suffer investment losses in the Roth after making the conversion, you may possibly lose the tax advantages that are available in other types of accounts. A loss in a taxable account will either offset gains from other taxable investments or provide a $3,000 deduction from ordinary income. A loss in a tax deferred account reduces expected future tax liability.

The recent thread on recharacterization of Roth conversions shows that, if the timing is right, you can still get tax advantages from a loss inside a Roth. But if the timing is off and you're past the recharacterization deadline, a loss inside a Roth is just a loss, with no offsetting tax advantages.
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Old 04-09-2015, 10:52 AM   #4
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I have thought about this for some time. I'm at a 28% marginal rate plus state and have changed all my 401K contributions to Roth. The decision comes down to 1) what will my tax rate be in the future. You can determine this to some degree by looking at how much you will take in pensions, IRA/401K draws, and other income sources. and 2) what changes will be made by govt. The tax rates could go up or down, brackets could change, and we could end up with a national sales tax. Wouldn't that be a kick in the pants if you converted all your tIRA savings to Roth then we switched to a national sales tax, you would have to pay that again. OH 3) do you plan to pass along a IRA to heirs ? you don't need to take RMDs from the ROTH where you will be required to take them from your tIRA. That may not be a big problem, but could impact your decision.
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Old 04-09-2015, 11:03 AM   #5
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I'm in the process of being screwed with unintended tax consequences. I put money into a SERP (deferred compensation plan) where I thought I could change the payout dates. It turns out I can't without delaying the payments for 5 years. I'm going from the 25% marginal rate when I put it in to 33% for most of these contributions. Once I figured out the downside, I stop contributing. I would have been much better off taking the money after tax and investing it. At least I would be only paying LT cap gains instead of the big ordinary income tax hit.

When my FIL was in his "facility," he blew away any income tax liability for every year he was there except the year where we sold his house. I pulled all the money out of his IRA ASAP once this started happening. I thought about rolling it over to a Roth but decided that the small amount wasn't worth the paperwork hassle. It was less than $20,000.
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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