Tax Free Withdrawal from IRA for Long Term Care & Charity?

[rkser]

Does any one have an idea, how much to (or does one) keep in Tax Deferred Accounts-IRAs for -

1)Tax Free Withdrawals for Charitable causes after age 70.5 - How much is allowed ? Is it one time or every year after age 70.5 ?

2)Tax Free Withdrawals for Long Term Care, I want to have an idea how much is tax free or is whatever the long term care costs are, are all tax free withdrawals.

I am doing Roth conversions every year, but want to keep money left in the IRA, that is the reason for my above question.

Thanks for any feedback.

 

[Gumby]

Does any one have an idea, how much to (or does one) keep in Tax Deferred Accounts-IRAs for -

1)Tax Free Withdrawals for Charitable causes after age 70.5 - How much is allowed ? Is it one time or every year after age 70.5 ?

2)Tax Free Withdrawals for Long Term Care, I want to have an idea how much is tax free or is whatever the long term care costs are, are all tax free withdrawals.

I am doing Roth conversions every year, but want to keep money left in the IRA, that is the reason for my above question.

Thanks for any feedback.

You can give $100k per year in Qualified Charitable Distributions (QCDs) and it can count against your RMDs. However, be careful that you make your QCDs first, and then RMD up to the required RMD amount.
See https://www.fidelitycharitable.org/guidance/philanthropy/qualified-charitable-distribution.html

Someone else may have a better idea about long term care. I am not aware of any way to make withdrawals from your IRA for that without paying taxes.

 

[RunningBum]

Could the subject be edited to give a clue on how much of what is being asked?

You don't get tax free withdrawals for LTC. You can itemize deductions, and LTC will easily put you over the standard deductions, but 7.5% of your AGI are not deductible as medical expenses. That exclusion means you'll likely pay a little tax for withdrawals for LTC. More if you have a lot of other income.

 

[rkser]

RunningBum, I edited the post heading, but still shows the same, sorry

 

[Gumby]

I have fixed the thread title.

 

[RunningBum]

I have fixed the thread title.

Thank you!

 

[RunningBum]

My mother went in memory care a few years ago and I thought they'd never pay income taxes again, but they do pay a little bit.

The issue I have with keeping money in a tIRA for LTC is that you'll probably pay years of RMDs before you need LTC, if you even need it at all. My Dad turns 89 next month and has not needed it. However, if you are also looking at doing QCDs, those can satisfy the RMD. At "worst" case you may be passing a large tIRA to your heirs, "worst" case being no LTC needed.

My plan is to try to fully convert my tIRA to a Roth if it can be done at a reasonable tax rate. I funded a DAF a few years ago so I'm not planning QCDs. If I do have large LTC expenses, I will sell highly appreciated mutual fund shares. Writing off income at LTCG rates is not as good as regular income rates on tIRA withdrawals, but it will help.

If I knew my future health situation, I would know the best financial strategy for this. I feel like my strategy is a good hedge for me. It may not be for others.

 

[rkser]

RunningBum, what is the reasonable tax rate to do Roth conversion ?

 

[SevenUp]

...what is the reasonable tax rate to do Roth conversion ?

A lower, or "not too much higher," marginal tax rate than you will pay when that money would be withdrawn later.

See Roth IRA conversion and “Traditional plus taxable” vs. Roth.

 

[RunningBum]

^^
Yes, the cutoff is dependent on your income level now vs. expected later when RMDs hit, and you are collecting SS and perhaps a pension. For me, these days I convert to the point where my qualified dividends would start being taxed. If the ACA cliff returns and is lower, I will stop short of there.

 

[rkser]

Thanks

 

[OldShooter]

RunningBum, what is the reasonable tax rate to do Roth conversion ?

It's tax rate arbitrage. What is your total net taxes now on the amount you'd convert? This includes federal income tax, IRMAA, state tax, and any other additional payments that might increase like taxes on SS. Compare this to the total you'd expect to pay in the future if you don't convert now. If you'd pay less now, do it. If you'd pay less later, don't convert.

It's not simple. Also consider things like a portion of your estate going to charity. This amount should be passed in a tIRA because the charity pays no taxes. If you convert and donate you will have made a gift to Uncle. Bad idea IMO.

 

[SevenUp]

It's tax rate arbitrage. What is your total net taxes now on the amount you'd convert? This includes federal income tax, IRMAA, state tax, and any other additional payments that might increase like taxes on SS. Compare this to the total you'd expect to pay in the future if you don't convert now. If you'd pay less now, do it. If you'd pay less later, don't convert.

Probably what was meant, but look at tax rate, not at total taxes. What matters is the amount left after tax.

For example, convert $1000 now at 22% vs. later (after investments have doubled to $2000) at 12%. Total tax paid now ($220) would be less than paid later ($240), but converting now would be a bad idea.

Converting now you end up with $1560, but converting later you end up with $1760.

 

[rkser]

This does not come easy for me, we are retired, our tax bracket last yr was 24%, I am in 3rd rung of IRMAA, we use TT & I did Roth conversions.
How do I find out the tax rate on the money we Roth converted ? I cannot even guess what rate we will pay in future

My rough reasoning to Roth convert is -
1)The Tax Rates going up in 2026,
2) When one of us passes then the high tax on survivor filing as single
3) Roth tax free money for the kids inheritance
4) Our savings kitty is reasonably high, so possibly our taxes in future will be around the similar tax brackets as at present, I know it is a crapshoot

 

[SevenUp]

This does not come easy for me, we are retired, our tax bracket last yr was 24%, I am in 3rd rung of IRMAA, we use TT & I did Roth conversions.
How do I find out the tax rate on the money we Roth converted ? I cannot even guess what rate we will pay in future

My rough reasoning to Roth convert is -
1)The Tax Rates going up in 2026,
2) When one of us passes then the high tax on survivor filing as single
3) Roth tax free money for the kids inheritance
4) Our savings kitty is reasonably high, so possibly our taxes in future will be around the similar tax brackets as at present, I know it is a crapshoot

You can go back to your TT return (call that "base"), subtract $1000 from your conversion amount, and have TT recalculate tax (call that "changed"), then calculate your marginal tax rate as (tax_base - tax_changed)/$1000.

You could do that multiple times for different amounts, or use something like the case study spreadsheet to automate the process. See the "Roth IRA conversion" wiki article linked previously for some "how to" with that tool (Excel needed).

Your reasons 1 & 2 are reasonable guesses. Reason 3 depends on your kids' marginal rates if they had to withdraw from an inherited tIRA. Reason 4, if you can pay the tax with cash on hand, also favors conversion.

Reasons not to convert include plans to make large charitable donations, either via QCDs or bequests.

 

[RunningBum]

This does not come easy for me, we are retired, our tax bracket last yr was 24%, I am in 3rd rung of IRMAA, we use TT & I did Roth conversions.
How do I find out the tax rate on the money we Roth converted ? I cannot even guess what rate we will pay in future

My rough reasoning to Roth convert is -
1)The Tax Rates going up in 2026,
2) When one of us passes then the high tax on survivor filing as single
3) Roth tax free money for the kids inheritance
4) Our savings kitty is reasonably high, so possibly our taxes in future will be around the similar tax brackets as at present, I know it is a crapshoot

I wouldn't worry about past conversion rates. You can't undo it, so just assume it's ok, and figure out if you want to do more conversions.

Your future rates aren't easy to figure out, but you can make an educated guess. I use a tax calculator like https://www.irscalculators.com/tax-calculator.

Start with your current numbers. You can use last year's and set the year to 2022 and see if it comes out the same as the taxes you're filing.

Add in your current projected SS benefit (if you aren't collecting now), and pension (as regular income) if you'll be getting one.
Find and use the RMD tables to see what your RMD would be with this balance, at age 72, and add that in as regular income.
Add in IRMAA if you'll be hitting that, and take out any ACA subsidy if you are getting one now, because you won't be at age 72.

It's far from perfect. I know your SS, IRA, and other investments will grow, but I make a conservative prediction that mine will grow at the same rate that tax brackets are increased for inflation. The only thing not increased for inflation is SS taxation, so if your SS is not fully taxed with these numbers, know that it might be. But it's at least an educated guess, probably on the low end.

As you say, tax rates are scheduled to go back up in 2026, so you can bump up whatever bracket this guess puts you in to the new bracket, if you want. Or use it as a tiebreaker.

 

[donheff]

Qualified Charitable Distributions (QCDs) from an IRA are a good way to get top of the line deductions on charitable giving. One caution to keep in mind is that the QCDs must go directly to the charities from the IRA. Use checks from the IRA, don't withdraw to another account and then gift. As for LTC, I have never heard of any tax exception for IRA distributions used to pay it. I would certainly be interested. I have heard of annuities with LTC riders being paid through IRAs but those withdrawals are taxable and I don't imagine insurance companies are tossing in LTC riders as free addons.

 

[OldShooter]

Probably what was meant, but look at tax rate, not at total taxes. What matters is the amount left after tax. ...

Correct -- what matters in the end is how much the player has in his pocket when the game is over.

But I don't think there is much reason to concentrate on rates, particularly federal rates, since several of the factors affecting the tax costs of an immediate conversion are outside the federal income tax. State taxes, for example, IRMAA, lost ACA subsidies, taxes on social security, etc. The impact of all of these must be totaled up, then the same elements must be estimated for the future date when a tIRA might be taxed. To use only the federal rate (I.e., 22%) has the potential to be seriously misleading. As H. L. Mencken told us a century ago: “For every complex problem, there is a solution that is simple, neat and wrong.”

 

[SevenUp]

...several of the factors affecting the tax costs of an immediate conversion are outside the federal income tax. State taxes, for example, IRMAA, lost ACA subsidies, taxes on social security, etc. The impact of all of these must be totaled up, then the same elements must be estimated for the future date when a tIRA might be taxed. To use only the federal rate (I.e., 22%) has the potential to be seriously misleading. As H. L. Mencken told us a century ago: “For every complex problem, there is a solution that is simple, neat and wrong.”

Agreed.

That's why we find the spreadsheet mentioned so useful: it incorporates all those items (not perfectly for state taxes, but close enough for us) into the calculated and graphed marginal tax rate.

 

[Gumby]

Easy enough to spreadsheet them for today's taxes. But suppose you are 56 today and your RMDs won't start until you are 75. Can you really predict all the state and federal tax changes in the interim? I haven't successfully predicted anything else 19 years in advance.

 

[SevenUp]

Easy enough to spreadsheet them for today's taxes. But suppose you are 56 today and your RMDs won't start until you are 75. Can you really predict all the state and federal tax changes in the interim?

Nope, so "back of the envelope" is all that is warranted. How big an envelope is a matter of taste.

A comment in an Investment Order post seems apt: "...you don't need great precision. The answer will either be "obvious" or "difficult to choose". If the latter, it likely won't make much difference which you pick anyway."

 

[Gumby]

Based on my own work on creating a spreadsheet to do this, I would say that the answer is going to be "difficult to choose" for the vast majority of people. Clear cut cases will be rare.

 

[imnontrad]

You pay federal income taxes on withdrawal for any reason except QCD (and that is a direct transfer). BUT since long term care is a deductible medical expense, chances are the net result will be minimal, at most.