medical expenses and IRA withdrawals

Marie58

I remember this topic coming up in the past. My DH is now in MC so I asked our CPA about this. Given our income and our anticipated deductions for 2021, she gave me an amount that I can withdraw tax free for this year. My questions are: What should I do with our withdrawals? Should I put it in savings or reinvest it or what? Also, do I wait until the end of 2021 to make the withdrawal to make sure I don't take out too much? Anything else I need to know? Thanks in advance for any responses.

Crushed

I put mine in the Roth IRA in any case.Investments depend on your time horizon.

Plenty of  good cheap firms that compete in this area.  do not pay fees. (Fidelity, Schwab and Vanguard are well known names  there are some others. 

What drives everything is the deductions for medical expenses. do it at the end of the year. 

Quilting brings calm

Doesn’t sound like you need it since you are thinking of delaying it until late 2021.  So why take it out at all in 2021?  Are you of an age that you have  to withdraw a minimum amount?  Are you trying to reduce the amount of minimum withdrawals you will have to start taking later so that you can stay under the next tax bracket in future years?   If neither of those apply, why take it out just to invest it elsewhere? 

However, if you don’t have liquid savings, then it might be beneficial to take out some profits now so that you don’t have to withdraw later when to market is down.   Then you could put it in a money market fund so that you could get to it without penalty. 

You could take it out in two chunks. One later this spring based upon the amount of medical expenses you’ve incurred by then. One late in 2021 for medical expenses you’ve incurred later this year.  

Joe C.

I agree with Crushed, take the tax free withdrawal and convert it to a Roth IRA. If you wait till the end of the year you will have a better estimate of all healthcare cost.

Deferring taking the withdrawal when it is tax free for some time in the future when you will have to pay taxes on the money makes no financial sense. Yes there are some drawbacks, your Medicare IRMA cost will likely increase but this is insignificant to paying a 22% or 25% income tax down the road. Also there is only one way for income taxes to go in the future and that is not down.

June45

Yes, Roth IRA.  I did that several years ago when my husband was out of work for a year and our income was very low.

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Crushed

Victoria2020 wrote:

 You have to have "earned income" to fund a Roth. Check with your tax advisor.

  this is incorrect its a Conversion  of an IRA" 

 

 Direct from IRS

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

How do I convert my traditional IRA to a Roth IRA?

You can convert your traditional IRA to a Roth IRA by:

• Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
• Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
• Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

As long as its not an RMD it's no problem.   I do this every year 

 

The reason you do it is to have money taxed at a lower tax bracket than it will be taxed as an RMD.  In my case as long as DW is alive we have massive medical expenses and can file a joint return.  So I do a Roth conversion that  taxes the money at a lower rate than I would  pay as a single person if DW died.   

 

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Marie58

Thanks Crushed. I was also confused about the 'earned income' so thanks for clearing that up.