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A Good Reason to Not Convert to Roth

While there are many reasons that it may be in your best interest to pay tax and convert funds from a traditional IRA to a Roth IRA, there are a few situations that you might want to keep in mind as you consider converting.

I covered Three Reasons You May Not Want to Convert to a Roth IRA in an earlier article, and here we’ll be talking about another – the probability of paying medical expenses from your traditional IRA.

Under current tax law, you are allowed to deduct medical expenses to the extent that the expenses exceed 7.5% of your Adjusted Gross Income (AGI). In effect, if you utilized IRA distributions to pay for these medical expenses, everything above 7.5% of your AGI can be tax free after deduction. This is much better than paying up to 35% on a Roth conversion and then using those funds later at no tax. Of course, if your medical expenses are something less than 7.5% of your AGI, or a relatively insignificant amount over that level, it might not make as much sense.

Since many of us can expect to pay a considerable amount for future medical expenses – whether for doctors and hospitals, or for nursing home costs, or even for in-home nursing care – it might make good sense to maintain a balance in a traditional IRA rather than converting all of it to a Roth IRA.

Just another item to consider as you think about converting money from your traditional IRA to a Roth IRA.

4 Comments

  1. Scott says:

    Interesting point and another in a long list of considerations for Roth conversions. While it should be considered, as one analyzes the pluses and minuses of conversions, it is simply a component of assessing your current, real, marginal income tax rate vs. you estimated future, real, marginal income tax rate. That real rate may incorporate a significant number of impactors, including the deductibility of a portion of your medical expenses, e.g., federal and state rates, IRMAA, CTC, EITC, ACA subsidies, SS taxation, your charitable intent, your heirs tax rates and many others. To the extent you can reasonably predict your future medical expenses, you may be able to get a sense of the extent they will reduce your future real marginal tax rate. I suspect this may be more difficult to predict vs. some of the others tax rate drivers.
    One point not explicitly addressed is that a large percentage of people who will have tax deductible medical expenses, are those who will be taking RMDs, so by default they are drawing income from their tax-deferred accounts, paying medical expenses and then itemizing them. Very few people should convert all of their tax-deferred assets to Roth assets, even if they are able to do so, and all who retain some tax-deferred assets will have these RMD requirements.
    My guess is that few people will find the deductibility of medical expenses to be the item that tips the scales one way or the other. That said, they should consider the impact

    1. jblankenship says:

      I agree completely with your assessment – this is not likely the reason someone will choose or not choose to convert, but rather another factor to take into account in the decision-making process.

  2. TFB says:

    The medical expense deduction can be mentally matched to to any other income to make it tax free, correct? Suppose you have some other income plus Roth IRA withdrawals, you are not really at a disadvantage versus other income plus traditional IRA withdrawals. It all comes down to the marginal tax rate, as you mentioned in the previous post.

    1. jblankenship says:

      Yes, that’s correct – any amount of medical expense above 7.5% of your AGI is deductible against income, as long as you are itemizing. But the benefit of this strategy comes when you consider the differential between paying tax now and converting to Roth versus waiting and taking the distribution later against deductible medical expenses.

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