My Parents' IRA

[LRDave]

I am still lucky enough to have my 87 year-old father and 85 year-old mother in my life. (I'm 53.) My dad has managed their finances well enough to-date. They have a MegaCorp pension for my dad and local government employee pension for my mom, plus SS for both. They have a small IRA with about $93K left in it.

Heretofore, my dad has never asked my advice on anything financial and I have never offered, as they were doing well enough. Last week, he asked me to look over his taxes and that allowed to do a back-of-a-paper-napkin audit of their finances. Really, they are doing fine. Short of them getting swindled or some economic upheaval, there doesn't seem to be anything to worry too much about. (With a full understanding that end-of-life care costs could easily swallow up all they have....)

I did notice that:

1) They have only taken minimum distributions from their traditional IRA.

2) Their income is still well below (relatively speaking) the top of the 15% tax bracket.

I have only recently become "enlightened" and so am still a newbie with newbie questions.

Isn't it sort of low-hanging fruit to move $ out of their traditional IRA and into a Roth, up to the 15% bracket level? Or I wonder if given the relatively small $ we are talking about, plus the capital retention strategy they'll want in their situation, plus the not-inconsiderable time it will take me to explain this all to them if I should just let it ride?

Any thoughts or insights appreciated!

 

[Sarah in SC]

It might depend on their plans for the IRA, if they don't end up needing the money. Some folks convert them to Roths with the idea that it is a "better gift" than an inherited traditional IRA because taxes are already paid.
Might be a good idea to have a tax pro look over their current assets and plan, and advise you all on what strategies are the most tax efficient.

 

[GrayHare]

Worth converting IMO. You might print one of the many Roth IRA conversion introductory info kits and present it to your parents. I think both Vanguard and Fidelity have such info online.

 

[jclarksnakes]

If they were to need to use it for something like nursing home care and drawing it out all at once would bump them up into a higher tax bracket it would of course be a better idea to do it in annual chunks now keeping within their 15% tax bracket. If you are in a higher tax bracket them doing it gradually with the 15% tax hit would make for a better inheritance for you. It may be a touchy issue to bring up and have them not think that you are only trying to increase your inheritance. Seems to me that it mostly depends on how good a relationship you have with them.

 

[gerntz]

It must be wonderful to have parents that age that are still so "with it". Congratulations!

 

[rescueme]

Since IRA's were only introduced in 1974 (38 years ago), means your father would have been 49 years old at the time, and only if the person did not have a pension plan (which it seems your father may have).

Contributions for those that had pensions did not start until 1982 (law changed in 1981).

I don't know when he stopped contributing, but in most of the earlier years you were limited in contributions ($1,500 in 1974) and $2,000 in 1982 (when I/DW started our respective IRA's). If your father had a pension plan and didn't start IRA contributions until 1982, when he would have been 57 years of age and rushing toward retirement shows why the current balance is not excessive.

When you speak of "minimum distributions", I assume you are only speaking of required distributions after the age of 70.5, which probably don't affect them much, tax wise.

I'm sure I'm incorrect in some of my assumptions, but I'm wondering if at their age (and the size of the IRA, as you stated) that you need not to spend the time shuffling money around to save a few dollars on taxes. As you said, they seem to be doing OK (financially) and at their age don't necessarly need to chase after a few dollars in tax savings. Now if you do help out and change things around a bit, the advantage will that you will learn for the future and also to the benefit of your plan - which I'll assume will be many times what they have when you get that age. Of course, you probably don't have the benefit of a pension.

Just my $.02.

 

[LRDave]

It must be wonderful to have parents that age that are still so "with it". Congratulations!

Yes, my sisters and I are blessed beyond words. They just celebrated their 65th wedding anniversary and are shooting for 75!

 

[LRDave]

I'm sure I'm incorrect in some of my assumptions, but I'm wondering if at their age (and the size of the IRA, as you stated) that you need not to spend the time shuffling money around to save a few dollars on taxes. As you said, they seem to be doing OK (financially) and at their age don't necessarly need to chase after a few dollars in tax savings. Now if you do help out and change things around a bit, the advantage will that you will learn for the future and also to the benefit of your plan - which I'll assume will be many times what they have when you get that age. Of course, you probably don't have the benefit of a pension.

Your assumptions are correct and it does appear that the Roth exercise would likely benefit the estate more than my parents.

As I think back on it, I think I might be more alarmed that they are carrying an inordinate amount in their checking account. ($57K) A quick look at their bank statments showed the balance continually rising. That is good in that I know they are contributing all they want to charity (about 20%) and satisfying all their material goods desires (very few now) and still spending less than they take in. But that is too much for a checking account! Again I am not worried about investment - I think they are not likely to get swindled but you hear stories......

I think I may suggest to dad that they go visit their friendly banker and move some of that over to CDs (not linked to the checking account for overdraft).

 

[REWahoo]

I'm in agreement with rescueme (he'd be shocked to read that if he actually saw it ). I think any benefit from a Roth conversion wouldn't be worth the possible stress it might cause in explaining the conversion process and getting them comfortable with it.

Other than the change you suggest to reduce the amount they keep in their checking account, I think you should tell them their strategy looks good to you. That will probably be a nice thing for them to hear as most of us older folks like to know our children approve of what we do.

 

[LOL!]

If they are contributing to charity, then they should be contributing the RMD directly from the IRA. That way, I believe the RMD does not add to their income (and thus reduces AGI). That may leave more room for conversion. (Tax laws on this may be changing though.)

Even in this case, I would look at what the calculator at Optimal Retirement Calculator and Retirement Decision Support System says about doing a Roth conversion.

As for large amounts in a checking account, that is not necessarily good as if an ATM or debit card is snagged, then it could lead to hassles. My bank suggested a 2nd checking account for traveling overseas. Just fund it with a little bit of money for those overseas ATM withdrawals. If you are hacked, then close that account and not your main checking account. It's basically free insurance for such an event.

 

[meierlde]

If they were to need to use it for something like nursing home care and drawing it out all at once would bump them up into a higher tax bracket it would of course be a better idea to do it in annual chunks now keeping within their 15% tax bracket. If you are in a higher tax bracket them doing it gradually with the 15% tax hit would make for a better inheritance for you. It may be a touchy issue to bring up and have them not think that you are only trying to increase your inheritance. Seems to me that it mostly depends on how good a relationship you have with them.

Of course if the total expense for nursing home care exceeds 7.5% of income, then you deduct all above the 7.5% So in that fashion if needed nursing home care becomes tax free. (Note that the 7.5% is not affected by ACA if your above 65, it becomes 10% if under 65 or if AMT hits)

 

[jclarksnakes]

Of course if the total expense for nursing home care exceeds 7.5% of income, then you deduct all above the 7.5% So in that fashion if needed nursing home care becomes tax free. (Note that the 7.5% is not affected by ACA if your above 65, it becomes 10% if under 65 or if AMT hits)

I had not thought of that. But, what is they need the money to move into assisted living?

 

[meierlde]

I had not thought of that. But, what is they need the money to move into assisted living?

At least some part of the assisted living costs could be deductable, depending on the condition involved as well as the medical outlook, i.e. if a physician says assisted living is medically necessary etc. If one gets to that point one clearly needs to get professional help in figuring out what is and is not deductable.

 

[Sarah in SC]

If they are contributing to charity, then they should be contributing the RMD directly from the IRA. That way, I believe the RMD does not add to their income (and thus reduces AGI). That may leave more room for conversion. (Tax laws on this may be changing though.)

This is a great point, LOL. This article is both clarifying and confusing regarding how 2012 might play out.
Tax Report: What to Do About IRA Charitable Donations - WSJ.com