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Help with W/D's for parents' retirement home
Old 08-16-2008, 10:09 PM   #1
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Help with W/D's for parents' retirement home

After many years of coaxing, my mid-late 70's parents have finally agreed to move to a retirement facility close to my brother and myself.

This has introduced some issues that, as an accumulator, I haven't had to deal with before, namely which pots of money should the rent come from?

The needs:

$15-$20K beyond current required IRA withdrawals and SS

The assets:

IRA - $275K
Taxable CD's (0.5-2 year maturities) - $100K
Prudential Stock - $15K
Potential House Sale (at least a year away) - $120K

The issues:

1) They are right at the edge of the income limits for having their SS taxed. I was unaware that this taxability existed. Any increase in AGI (e.g. increased IRA W/D's) will cause a significant increase in taxes. (They had 0 taxable income this past year).

2) They are in the tax bracket where they will get 0% tax for capital gains this year (sell Prudential stock?). The CG's will still be figured into the AGI and consequently increased SS taxability.

3) To delay increase in taxability, could use CD's as they mature, but their emergency money needs to come from this until house sells.

So you see, there are a number of conflicting issues here.

Any opinions for a strategy would be appreciated.
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Old 08-17-2008, 06:39 AM   #2
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Congratulations on your parents making a good decision before the "train wreck" my in-laws had. DW and I were unsuccessful for about 7 years trying to convince them they needed to move to an independent living facility.

Back to your money question....

Is this an assisted living or an independent living facility? If assisted, there is some "medical need" that will allow the total cost of their assisted living bill to be tax deductible. If this is the case, your tax issues will go away. You will then be able to accelerate the transfer of assets into after tax accounts.

If this is all "independent living" now, it won't be that way for that much longer. You are actually just needing a bridge for 5 to 10 years to minimize taxes.

You must be getting a few thousand out of the IRA in required minimum distributions. My 87 year old FIL is having to take out about 10% of his account this year. I'm guessing that your parents will have to withdrawl $10 to 15,000 this year. That's almost your whole requirement and you can't do anything to stop it.

That leaves $5 to 10,000 to come out of after tax money. The CDs will easily cover this until one or both go into assisted living or nursing care.

The major "emergency" you need to plan for is that one of them remains in independent living while the other one goes into assisted or nursing. That will more than double their spending. At that point, taxes will go away as an issue and the IRA will have to be raided as needed. There aren't many other "emergencies" to consider once the move has been made.

I suggest that you calculate the financial scenarios for them staying in their current care stage. You'll find that their costs are easily covered. Then assume 1 is in nursing care and see how long their assets would last. Finally, see how many years they can financially survive if both are in nursing care.

You'll have to do this at whatever costs are in your area. My in-laws went to a very nice facility in the Houston area where nursing care is about $60,000 per year. We could have put them in a not as nice but still OK facility for about $45,000. Every area is different.

We picked the place we put them primarily because it had all levels of care. It made it possible for my FIL to easily visit his wife in the nursing facility while he was in the assisted living section. That sure beat DW driving him around every day.

Make sure your parents have their POAs, wills and directives to physicians all in order. Right now they are probably considered competent but things can change quickly. Not having the right paperwork can make your life a living hell.

Good luck with this. I know it is traumatic for you and them.
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Old 08-17-2008, 06:41 AM   #3
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SPIA? Vanguard? There are some taxation factors dealing with an SPIA if the money comes from post tax funds (like the taxable CD's; regardless if taxes were due or not). I am not knowledgeable enough to advise - but I am sure just mentioning a SPIA will get lots of good comments for you (hopefully).
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Old 08-17-2008, 06:49 AM   #4
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SPIA? - but I am sure just mentioning a SPIA will get lots of good comments for you (hopefully).
The last thing they need right now is an annuity. Their care is going to be in significant lumps of cash for a finite period of time. gindie didn't go into their medical issues but it's safe to assume that they aren't in the best of health or they wouldn't be moving into some sort of care facility.
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Old 08-17-2008, 06:58 AM   #5
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Quote:
Originally Posted by 2B View Post
The last thing they need right now is an annuity. Their care is going to be in significant lumps of cash for a finite period of time. gindie didn't go into their medical issues but it's safe to assume that they aren't in the best of health or they wouldn't be moving into some sort of care facility.
I did not see any mention of medical problems (or any mention of how they would be covered (paid for)). But you may be right.
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Old 08-17-2008, 08:40 AM   #6
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Originally Posted by 2B View Post
Is this an assisted living or an independent living facility?

That leaves $5 to 10,000 to come out of after tax money.
2B -

Thanks for the info (we have had several PM conversations about our situations over the years). The $15-20K they need is in addition to their regular $10K IRA distributions.

This will be Independent Living, but I agree that Assisted isn't too far off. Both are Diabetic, father has Congestive Heart Failure and post-stroke issues. But, so far their Medicare Supplement has significantly reduced their medical bills.
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Old 08-17-2008, 08:56 AM   #7
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I would sell the stock over one or two years to take advantage of the 0% in capital gains tax, even though it might cause some tax of the SS. I would continue minimum distributions from the IRA. I would take the rest as needed from the CDs. This seems to make the most sense for minimizing taxes. The CDs should not be depleted before the house is sold.

Reassess yearly.
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Old 08-17-2008, 09:19 AM   #8
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Originally Posted by gindie View Post
2B -

Thanks for the info (we have had several PM conversations about our situations over the years). The $15-20K they need is in addition to their regular $10K IRA distributions.

This will be Independent Living, but I agree that Assisted isn't too far off. Both are Diabetic, father has Congestive Heart Failure and post-stroke issues. But, so far their Medicare Supplement has significantly reduced their medical bills.
Your situation is flooding back into my brain. I'm glad they are finally "moving forward" so to speak.

I played with the tax implications of things with TaxCut for my in-laws. I ran many different scenarios. This is probably the easiest way of evaluating the seemingly infinite complexity of how different forms of income impact the tax bill.

Keep in mind that when one of your parents cross over into assisted living they will be able to deduct the entire bill as medical expenses. To cover any possible IRS problems, DW had my in-laws' doctor write a letter saying that their medical condition requires the level of care being provided. While my MIL was alive, they had no income tax due until we sold their house. Their gain exceeded the $500K exclusion. With her out of the picture, my FIL has a small amount of tax due and DW writes quarterly checks for the estimated tax.

Clean out the house ASAP and sell it. Getting the house off the books will help cut expenses.

Don't be too clever. Keep it simple.
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Old 08-17-2008, 11:07 AM   #9
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The following may not be specifically helpful to gindie's situation, but might be helpful to others ....

It seems that the parents were likely in the 0% tax bracket for some time. Folks might ask their parents if they considered converting some of their traditional IRA money to a Roth IRA, so that future RMDs would not force SS income to be taxed so much.
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