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Roth conversion for aging parent

#1
My dad is in his late 80s and still in reasonably good health.  While he's still very capable mentally, he lets me handle all his finances / investments.  He currently has about $600,000 in an IRA account and $500,000 in a taxable account.  He receives two pensions plus social security totaling somewhere near $100k / year which cover his basic living expenses, so his need for money from savings is generally only for the occasional big vacations he still takes.  When he passes, my brother (early 60s) and myself (late 50s) will inherit 50/50.  I am in the 32% tax bracket.  My brother is the same or [more likely] higher.  Both of us will probably be working for another 2-4 years with spouses who may continue beyond that.
 
Should we look at converting dad's IRA to a Roth, paying taxes on the conversion out of the taxable account?
Are there any total income amounts I should worry about hitting that will affect dad's Medicare or social security ($200k Medicare MAGI limit?  Are there others?)?
 
And then comes the harder to answer question - If we're converting, how much to convert each year with the goal of both lowering dad's future RMDs as well as leaving a tax-free inheritance to his kids.
 
Thanks for any insights!
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#2
My situation is quite similar your dad's, in financial and chronological terms; I am 86, but I do my own investing.
    Yes, my advice is to convert, consistent with some reasonable restrictions. Personally, I have been converting heavily for about three years. Right now we (the wife and I) have about 500k in  Roth IRAs, and about the same amount left  in a Traditional IRA. I intend to continue until the conversion is 100%.  A significant difference may be that I am still married; I get the impression that your dad is not. That can have a significant effect on strategy.
      My personal conversion limit is about 100k per year. I decided on this limit to keep my taxable AGI below 170k. This is the medicare cost bump, of  few thousand a year, for MFJ filers. If your dad files as a single taxpayer, the limit is much lower, and, with his other income, he could not avoid the bump. However, I recommend that you may still want to do a substantial conversion. Run the numbers, especially the escalating MRDs, and you may wish to ignore the bump (maybe you are already there). If you can, pay the damned taxes now and get it over with.
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#3
"Should we look at converting dad's IRA to a Roth, paying taxes on the conversion out of the taxable account?"

I don't think so! In one's 80's you run up against a wall on conversions. By converting today, you pay taxes today. And the advantage of having money in a Roth depends on how many years it's in there. 50 years of tax-free growth is a great thing! But paying $10,000 in taxes today to make $300 more in the Roth than you would in a conventional IRA no longer makes sense. The difference is life expectancy when one is in his 80's.

 
For the same amount of effort I would look instead into some potentially far more advantageous possibilities. At his age he could convert highly appreciated assets into a gift annuity, take a deduction, get income, forego capital gains taxes, and set it up so that you inherit the annuity upon his death. This isn't a recommendation, I'm just saying that it's good to consider the options and where your effort can produce the maximum benefit.
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#4
(11-21-2018, 11:45 AM)a1pharm Wrote: "Should we look at converting dad's IRA to a Roth, paying taxes on the conversion out of the taxable account?"

I don't think so! In one's 80's you run up against a wall on conversions. By converting today, you pay taxes today. And the advantage of having money in a Roth depends on how many years it's in there. 50 years of tax-free growth is a great thing! But paying $10,000 in taxes today to make $300 more in the Roth than you would in a conventional IRA no longer makes sense. The difference is life expectancy when one is in his 80's.

 
For the same amount of effort I would look instead into some potentially far more advantageous possibilities. At his age he could convert highly appreciated assets into a gift annuity, take a deduction, get income, forego capital gains taxes, and set it up so that you inherit the annuity upon his death. This isn't a recommendation, I'm just saying that it's good to consider the options and where your effort can produce the maximum benefit.

Nothing is currently highly appreciated as his taxable account was re-balanced just a few years ago.
 
As for the tax conversion - The thought is that a) Dad currently faces an increasing RMD and b) The children (my brother and myself) are both in a much higher tax bracket.  Time does not affect the final value, rather tax rates.  For example, Assume $10k over 5 years earning 10% a year with at dad's effective rate of 22% vs the kids' rate of 32%.
With no conversion, after 5 years the funds grow to $16,105 pre-tax...which kids inherit and eventually pay taxes on leaving $10,951
With Roth conversion, the funds grow to $12,562, but that's tax free money.  There's the added advantage of money already converted is no longer subject to an RMD during my dad's lifetime.

   
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#5
I am aware of Charitable Gift Annuities (although I don't know very much about them) but the way you describe it, this sounds like it may be something else that is gifted to the sons. Is the "deduction" a charitable deduction and they would be placing the money with the charity in order to get the lifetime income. I have never thought about inheriting annuities. With annuities, I have always thought that everything that is withdrawn that is not basis is taxed as ordinary income. If this is a Charitable Gift Annuity or something else, how would payments or withdrawals from the annuity be taxed?
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#6
Your answer (or at least part or it) lies in the question of do you want to inherit (as a non-spouse) a ROTH or a Traditional IRA? There are IRS rules that govern each with different options available for each. And given your father's age, you must consider the 5 year lookback.

______________________________________________________________________________________


"If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member, you have several options, depending on whether the account holder was under or over age 70½ .

If the account holder was over 70½, these are your choices.

Option #1: Open an Inherited IRA: Life Expectancy Method

Account type
You transfer the assets into an Inherited IRA held in your name.
Money is available
You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder's death.


Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Other considerations
Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer.
If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
You will not incur the 10% early withdrawal penalty.
Undistributed assets can continue growing tax-deferred.
You may designate your own IRA beneficiary.
Option #2: Lump Sum Distribution

Account type
None. All assets in the IRA are distributed to you.
Money is available
All at once.
Other considerations
You will pay income taxes on the distribution all at once.
You will not incur the 10% early withdrawal penalty.
You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

If you are inheriting a Roth IRA from a friend or family member, you have several options— including opening an Inherited IRA.

Option #1: Open an Inherited IRA: Life Expectancy Method

Account type
You transfer the assets into an Inherited IRA held in your name.
Money is available Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death.
Other considerations
Distributions are spread over the beneficiary's single life expectancy.
If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.
Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
You will not incur the 10% early withdrawal penalty.
Undistributed assets can continue growing tax-free.
You may designate your own beneficiary.
Option #2: Open an Inherited IRA: 5 Year Method

Account type
The assets are transferred into an Inherited IRA held in your name.
Money is available

At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the fifth year after the year in which the account holder died.
Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
You will not incur the 10% early withdrawal penalty.
Undistributed assets can continue growing tax-free for up to five years.
You may designate your own beneficiary.
Option #3: Lump Sum Distribution

Account type
None. All assets in the Roth IRA are distributed to you.
Money is available
All at once.
Other considerations
If the account is less than five years old at the time of the account holder's death, earnings are taxable.
_______________________________________________________________________

Given your father's age (and actuarial tables), we are basically talking about your (and your brother's) money. View it as your money and act accordingly based on tax rates for your father and yourself/brother.

Good luck! You've got some homework to do. Or, educate yourself about this issue and discuss it with your accountant.
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#7
Any idea how the 5 year rule works on an inherited Roth? Dad has never had a Roth, so if we convert some now and then more in January, how would it be treated if it were inherited and we started taking our RMDs? I assume we (my brother and I) could open accounts using the life expectancy method and then remove only a small portion each year, not hitting "profits" or requiring taxes, but maybe I'm not fully understanding the rules?
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