Too much money in IRA

[TheWizard]

If a person absolutely really has too much in the IRA, they can Will some to children / grand kids upon the first death.
Does prevent a little bit the issue of remarriage to a nurse/caregiver diverting the family estate..

Indeed.
And this approach tends to prevent the WHINING we often hear about the surviving spouse being in a higher tax bracket.

Note: I'm a formerly married single person in the 24% Federal tax bracket and the water is fine, just fine...

 

[Flyfish1]

^^^ Thanks for sharing. We would have been in the 25% bracket or worse (assuming TCJA expires on time) for the rest of our lives, won't be thanks to a little planning. Roth conversions not difficult and they're worth the effort for some with large tax deferred holdings. Why anyone would passively pay more than legally required is beyond me...

No argument - but they don't mathematically make sense for everyone. I've looked at Roth conversions several times and it doesn't add up at least using the Schwab Roth calculator.

 

[GrayHare]

Look at the jawboning that goes on here to save $40 or so on Turbotax. IMO Midpack's numbers are worth a few words since they show the potential for 10,000 times as much savings ($400k) by paying attention to IRA taxation. If I had it to do over, I'd have skipped an IRA entirely and instead put the same amount into a non-dividend payer like Berkshire Hathaway. There would be no taxes until I sold some, and then those cap gains would be taxed at just 15%. And the entire amount would get a step up in basis for my beneficiaries, to boot!

 

[pb4uski]

.... Regarding LTC, if you have large medical expenses for assisted living or memory care, you can make larger withdrawals and write a lot of the income off with your medical expense deductions. You wouldn't want to withdraw money now specifically for LTC since you wouldn't get the advantage of the tax deductions.

That's a twist I hadn't thought of in relation to self-insuring. thanks.

An interesting example. Single senior with lots of IRA money goes into nursing home that costs $96k a year and their only income is $24k of SS. They withdraw $72k from their IRA and use that plus the $24k from SS to pay for $96k nursing home bills.

Their AGI is $92.4k... $72k tIRA withdrawal and $20.4k SS (85% of $24k benefits received).

They can deduct $85.47k in itemized deductions [(1-7.5%)* $92.4k AGI]

Their federal taxable income is $6.93k and their tax is $693 (10% bracket).

So their effective tax rate on the $72k tIRA withdrawal used for nursing home care is less than 1%.

 

[Midpack]

You can definitely save too much in a TIRA such that you can be forced to pay substantially more in taxes over your lifetime, by being forced into a higher tax bracket for 15-25 years because of RMDs you don't want or need. That's why anyone with a lot of money in a TIRA owes it to themselves to consider Roth conversions. Not beneficial for some, a wash for some, but highly beneficial for others. And relying on a free online calculator to decide on Roth conversions is likely a mistake...

The difference in lifetime taxes in the example below amounts to almost $400K more in Federal taxes without conversions...

^^^ Thanks for sharing. We would have been in the 25% bracket or worse (assuming TCJA expires on time) for the rest of our lives, won't be thanks to a little planning. Roth conversions not difficult and they're worth the effort for some with large tax deferred holdings. Why anyone would passively pay more than legally required is beyond me...

No argument - but they don't mathematically make sense for everyone. I've looked at Roth conversions several times and it doesn't add up at least using the Schwab Roth calculator.

I never said they did, to the contrary...

And if you mean this calculator, that's nowhere near adequate to make an informed decision. If you know you won't be pushed into a higher tax bracket (than before) due to RMDs, no need to look further. https://www.schwab.com/ira/ira-calculators/roth-ira-conversion

 

[Winemaker]

An interesting example. Single senior with lots of IRA money goes into nursing home that costs $96k a year and their only income is $24k of SS. They withdraw $72k from their IRA and use that plus the $24k from SS to pay for $96k nursing home bills.

Their AGI is $92.4k... $72k tIRA withdrawal and $20.4k SS (85% of $24k benefits received).

They can deduct $85.47k in itemized deductions [(1-7.5%)* $92.4k AGI]

Their federal taxable income is $6.93k and their tax is $693 (10% bracket).

So their effective tax rate on the $72k tIRA withdrawal used for nursing home care is less than 1%.

So in order to win this taxation arbitrage is to end up in a nursing home?

 

[GrayHare]

The same technique can, of course, be used in any year you have significant deductions. For example, bunching charitable gifting into one tax year can reduce the effective tax rate on that year's tIRA withdrawals.

 

[523HRR]

What hurts is all those cap gains (preferential tax rate) gathered within a tIRA and t401k will instead be taxed at higher ordinary income rates.

This! Now we'll pay 35% marginal tax on RMDs instead of 20% cap gains rate.

 

[Wile E. Coyote]

So in order to win this taxation arbitrage is to end up in a nursing home?

The deductibility would hinge on whether it is "primarily for medical care." Otherwise living expenses are personal expenses and non deductible. So, you have to have a plan of care before you are able to deduct the whole thing.

Question
My father is in a nursing home and I pay for the entire cost. Can I deduct these expenses on my tax return?

Answer
Yes, in certain instances nursing home expenses are deductible medical expenses.

If you, your spouse, or your dependent is in a nursing home primarily for medical care, then the entire nursing home cost (including meals and lodging) is deductible as a medical expense.

If that individual is in a home primarily for non-medical reasons, then only the cost of the actual medical care is deductible as a medical expense, not the cost of the meals and lodging.

To determine if your father qualifies as your dependent for this purpose, refer to Whose Medical Expenses Can You Include and Nursing Home in Publication 502, Medical and Dental Expenses.

Deduct medical expenses on Schedule A (Form 1040), Itemized Deductions.
The total amount of all allowable medical expenses is the amount of such expenses that exceeds 7.5% of adjusted gross income.

 

[copyright1997reloaded]

I find myself in this predicament, i.e. "too much money in tax deferred". As someone earlier in the thread said, it is better to have a tax problem than an income problem. Nevertheless, it is a problem.

As it stands, when I am forced to take RMD's it won't be pretty, and I will find myself well into the 32% (Single) federal tax bracket, and perhaps in the 35% one. That's assuming the current brackets remain. If we go back to the old tax rates, I will find myself anywhere between -1% (compared to now) to +4%, plus the loss of the now large standard deduction.

But it is what it is. My original "plan" (when I retired in 2009) was to do Roth conversions. Instead, I ended up working in career #2 which caused my ability to convert to become pretty much non-existent. On top of that I foolishly continued to do tax-deferred (up until a few years ago).

Another "bad" (because it was good) problem - last year I had more interest income in my tax deferred accounts (from T-Bills and CD's) than what I was able to do as a Roth conversion! So even though I did some conversion, the expected eventual RMD went up instead of down.

Now that I am on Medicare (part B) IRMAA has raised its ugly head, further complicating things. I had planned on going to the top of the 24% federal bracket via Roth conversions, but now am hesitant to go beyond 160K or so to stay in the $175 (roughly) per month IRMAA impact category.

But it is what it is, and I'd rather have this problem than the problem of not having enough to pay my bills.

 

[Sunset]

So in order to win this taxation arbitrage is to end up in a nursing home?

I look at it as, the last $400K or so of IRA money can be left there and not Roth converted as it's my LTC insurance.

Frankly some places charge ~$126 /yr, so that much is probably only good for ~5 years, as will have a little SS contributing.

 

[pb4uski]

So in order to win this taxation arbitrage is to end up in a nursing home?

A foolish way to look at it methinks. Just nice to know that if the need ever arises then a substantial tax benefit is available.

 

[5Miler]

Apologies in advance for my rambling.

I have wrestled with the Roth conversion issue for several years now but never really took the time to investigate it in much detail. By the time I got serious about it, I was taking SS (started at 68.5 years) so had the added joy of figuring that in. I pretty much defaulted to converting $30K per year for the last three years as the tax withheld from my SS at 12% almost exactly covered that level of Roth conversions.

I still have 76% of my Roth/IRA funds in my rollover IRA so tonight I used the IRS calculators.com web site to investigate a little deeper. I didn't see any use in the Schwab Roth calculator when on SS unless I missed something there.

I have a micro pension that I rounded to $1,400 per year and take SS which are my primary sources of income. My IRA withdrawal rate has been zero for several years other than for Roth conversions. As a note, I did live off of my IRA for the first 10 years of my retirement until I began SS two years ago.

I found that if I take only my micro pension and SS I miss out on a lot of free Roth conversions as I would have no taxable income for the year and could take some tax free Roth conversions. To me it looks like my sweet spot until RMDs in 2026 would be between the top of the 10% bracket and the point 50% of SS is taxed. RMDs in 2026 will put me just under the 22% bracket if returns the next two years average 3.9%. There are still a lot of moving parts over the next years with market changes, RMD increases with age, potential tax increase (22% to 25%), inflation adjustments to tax tables and etc which I am confident will put me securely in the 22% or higher range.

While doing Roth conversions at 22.2% isn't exactly optimum, it does allow me to move more into my Roth providing spending flexibility in the future with tax free dollars.

Hopefully my quick calculations below make some sense.
Incr tax rate is the tax rate paid on the last $1K in that bracket.

With SS and Pension Income Only

Pension Income 1,400
IRA Conversion 0
SS Income 43,268
Total Income 44,668
Fed Tax 0
Tax % 0
Incr Tax Rate 0


Converting to top of 0% bracket

Pension Income 1,400
IRA Conversion 10,600
SS Income 43,268
Total Income 55,268
Fed Tax 0
Tax % 0
Incr Tax Rate 0

Converting to the top of the 10% bracket

Pension Income 1,400
IRA Conversion 17,000
SS Income 43,268
Total Income 61,668
Fed Tax 1,157
Tax % 1.9%
Incr Tax Rate 18.5%

Converting to the point 50% of SS is taxed

Pension Income 1,400
IRA Conversion 31,100
SS Income 43,268
Total Income 75,768
Fed Tax 4,287
Tax % 5.6%
Incr Tax Rate 22.2%

Converting to the top of 12% bracket

Pension Income 1,400
IRA Conversion 36,200
SS Income 43,268
Total Income 80,868
Fed Tax 5,419
Tax % 6.7%
Incr Tax Rate 26.0%

 

[Winemaker]

A foolish way to look at it methinks. Just nice to know that if the need ever arises then a substantial tax benefit is available.

I was not serious, hence the grin face. I would not wish a nursing to anyone.

 

[Spock]

So in order to win this taxation arbitrage is to end up in a nursing home?

It's a stepping stone on the path to the grave.
Some may skip over that stone
but everyone ends up at the final destination.

The alternative to skipping a nursing home is dying while you still got some independence left.

 

[Spock]

An interesting example. Single senior with lots of IRA money goes into nursing home that costs $96k a year and their only income is $24k of SS. They withdraw $72k from their IRA and use that plus the $24k from SS to pay for $96k nursing home bills.

Their AGI is $92.4k... $72k tIRA withdrawal and $20.4k SS (85% of $24k benefits received).

They can deduct $85.47k in itemized deductions [(1-7.5%)* $92.4k AGI]

Their federal taxable income is $6.93k and their tax is $693 (10% bracket).

So their effective tax rate on the $72k tIRA withdrawal used for nursing home care is less than 1%.

And the added "bonus" here is it negates the MFG-to-single tax hike when one spouse dies. This is starting to really give buying LTCI some mathematical competition.

 

[Spock]

The deductibility would hinge on whether it is "primarily for medical care." Otherwise living expenses are personal expenses and non deductible. So, you have to have a plan of care before you are able to deduct the whole thing.

Question
My father is in a nursing home and I pay for the entire cost. Can I deduct these expenses on my tax return?

Answer
Yes, in certain instances nursing home expenses are deductible medical expenses.

If you, your spouse, or your dependent is in a nursing home primarily for medical care, then the entire nursing home cost (including meals and lodging) is deductible as a medical expense.

If that individual is in a home primarily for non-medical reasons, then only the cost of the actual medical care is deductible as a medical expense, not the cost of the meals and lodging.

To determine if your father qualifies as your dependent for this purpose, refer to Whose Medical Expenses Can You Include and Nursing Home in Publication 502, Medical and Dental Expenses.

Deduct medical expenses on Schedule A (Form 1040), Itemized Deductions.
The total amount of all allowable medical expenses is the amount of such expenses that exceeds 7.5% of adjusted gross income.

I don't think it's that hard for ASL to be declared medically necessary.
Convincing the IRS it's medical should be easier than a LTCI policy claim... the IRS doesn't send a nurse from another state to interview for the claim review as TransAmerica did for my Dad diagnosed with dementia.

 

[Chuckanut]

I find myself in this predicament, i.e. "too much money in tax deferred". As someone earlier in the thread said, it is better to have a tax problem than an income problem. Nevertheless, it is a problem.

As it stands, when I am forced to take RMD's it won't be pretty, and I will find myself well into the 32% (Single) federal tax bracket, and perhaps in the 35% one. That's assuming the current brackets remain. If we go back to the old tax rates, I will find myself anywhere between -1% (compared to now) to +4%, plus the loss of the now large standard deduction.

But it is what it is. My original "plan" (when I retired in 2009) was to do Roth conversions. Instead, I ended up working in career #2 which caused my ability to convert to become pretty much non-existent. On top of that I foolishly continued to do tax-deferred (up until a few years ago).

Another "bad" (because it was good) problem - last year I had more interest income in my tax deferred accounts (from T-Bills and CD's) than what I was able to do as a Roth conversion! So even though I did some conversion, the expected eventual RMD went up instead of down.

Now that I am on Medicare (part B) IRMAA has raised its ugly head, further complicating things. I had planned on going to the top of the 24% federal bracket via Roth conversions, but now am hesitant to go beyond 160K or so to stay in the $175 (roughly) per month IRMAA impact category.

But it is what it is, and I'd rather have this problem than the problem of not having enough to pay my bills.

+1

I looked at more Roth Conversions but overall I think they are pretty much a wash for me. Add in the dangers of going up a level or two in the IRMAA payment plan and the Roth conversions go negative. This assumes my estimates are right. <—- always a danger point. So, I live with it.

I figure the best thing to do is to keep letting my dollars “Work harder than I am working” and let the chips fall where they may. The other good thing I am doing is increasing my spending on things and experiences that add to the quality of life of me and mine. My favorite FIRE comic below:

 

[Midpack]

^^ None of us can guarantee we'll be right, so getting close is certainly good enough. We can't predict future tax rates, returns or longevity among other variables, you just make the best judgement based on what you know and assume.

 

[Dash man]

There’s another tool called NewRetirement that helps illustrate Roth Conversions. It’s not free, but they may have a free trial.

 

[LV_Travel]

Most high income lifers over fund TIRA

Berkshire or index funds can grow tax free for decades and be pulled at cap gain rates only as needed. TIRA minimal withdrawals are not avoidable and incur not only hirer ordinary income tax rates but also hit IRMA limits raising medicare cost. Lose lose.

 

[rk911]

I find myself in this predicament, i.e. "too much money in tax deferred". As someone earlier in the thread said, it is better to have a tax problem than an income problem. Nevertheless, it is a problem.

As it stands, when I am forced to take RMD's it won't be pretty, and I will find myself well into the 32% (Single) federal tax bracket, and perhaps in the 35% one. That's assuming the current brackets remain. If we go back to the old tax rates, I will find myself anywhere between -1% (compared to now) to +4%, plus the loss of the now large standard deduction.

But it is what it is. My original "plan" (when I retired in 2009) was to do Roth conversions. Instead, I ended up working in career #2 which caused my ability to convert to become pretty much non-existent. On top of that I foolishly continued to do tax-deferred (up until a few years ago).

Another "bad" (because it was good) problem - last year I had more interest income in my tax deferred accounts (from T-Bills and CD's) than what I was able to do as a Roth conversion! So even though I did some conversion, the expected eventual RMD went up instead of down.

Now that I am on Medicare (part B) IRMAA has raised its ugly head, further complicating things. I had planned on going to the top of the 24% federal bracket via Roth conversions, but now am hesitant to go beyond 160K or so to stay in the $175 (roughly) per month IRMAA impact category.

But it is what it is, and I'd rather have this problem than the problem of not having enough to pay my bills.

If you don't NEED the $ to fill budget holes consider donating some, or all, of the RMD to a QCD. The amount designated to the QCD never hits the income side of the 1040.

 

[Dash man]

We bit the bullet and did a large Roth conversion this week. We’ll pay the taxes out of our cash bucket. We were hoping to slowdown the conversions, but the account kept growing. Good problem to have. We just want this done before the TCJA sunsets in 2026. We’ll still have seven figures in the tIRA, but it will go mainly for QCDs.

 

[perinova]

One way to minimize RMDs and, taxes, is to take the money as early as possible. So at age 60,start withdrawing using actuarial tables. Past calculations I have made showed you always minimize taxes, even if you reinvest the money in your taxable account. Plus: you get to enjoy your money .
By vertue of the tax brackets, taking SS early probably also minimize overall taxes, since you get less money for longer period of time.

I am not there yet, but I am tempted to have a single lifestyle change at age 62, taking SS and withdrawing from IRAs.

 

[mickeyd]

Better to have too much $ in your IRA than too little. I have a similar problem, but some how have figured out how to either spend or reinvest my annual RMD distributions. It is a very good problem to have.