In general, older clients should avoid a Roth conversion. The tax benefit they get next to the amount they pay in taxes in their remaining lifetime is not worth it, except if the plan is to leave that Roth to younger beneficiaries who can stretch the benefit out over their own lifetimes. Even so, once a client reaches age 70 1/2 and becomes subject to required minimum distributions, it’s more expensive to convert to a Roth. That’s because the first dollars distributed from the IRA are deemed to satisfy the RMD and RMDs cannot be converted. You would first have to withdraw the distribution amount, and then the remaining IRA funds would be eligible for conversion. But then the tax cost is increased since you are paying tax on the RMD amount that does not end up in the Roth IRA. This would not be cost effective unless there were large deductions or losses to keep the taxes low on the Roth conversion. Remember that you are always looking at the additional tax cost of the Roth conversion as a key factor in deciding whether a conversion will be tax-efficient over the long haul.

9. The Effect Of Qualified Charitable Distributions

These distributions are tax savers. They can increase the tax benefit of gifting. The donation goes directly from the IRA to charity. But the charitable distribution is only for IRA owners or beneficiaries who are 70 1/2 years old or older. However, if these clients are also subject to required minimum distributions and using their IRA for making donations via the qualified charitable distribution, it’s better not to convert to a Roth IRA since the charity distribution is already removing taxable IRA funds at no tax cost anyway. Never do this with Roth IRAs, since those are after-tax funds. In fact, after-tax funds don’t qualify for the qualified charitable distribution. If the client’s plan is to primarily use their IRA for making donations (and that’s a good tax planning strategy), then the charitable distribution is the better move and the clients should not be doing a Roth conversion. One exception is if they want to carve out a portion of their IRA they wish to leave to children or grandchildren. Then a Roth conversion would work for those funds.

10. Future Medical Expenses

If clients need to tap IRA funds to pay heavy out-of-pocket medical expenses in retirement (which won’t be reimbursed with insurance), then the Roth conversion is yet again a bad choice. The medical expense deduction survived tax reform (it’s now limited by a 7.5% AGI threshold in 2018 and then a 10% threshold for 2019 and later years). The deduction may be used to offset the tax on future IRA distributions. This, of course, assumes that the medical bills will be high enough to itemize, given the new expanded standard deduction.

You wouldn’t want to do a Roth conversion and then have those medical deductions wasted or, even worse, paid from after-tax funds in a Roth IRA. For older clients, some bigger medical expenditures may be more easily anticipated. The clients may already know they will need to make major investments in medical equipment or home improvements, specifically for medical care items such as elevators, chairlifts, widened hallways, doorways for wheelchairs, or other wheelchair access renovations such as exit ramps. Additional outlays might be needed for railings, support bars or bathroom modifications, to name a few things. These are big ticket items that could easily offset the tax on even larger IRA distributions.

While home improvements are generally not deductible, they are if their main purpose is to provide medical benefits. These modifications should not increase the value of the home (they rarely do and often reduce home values). Medical modifications in rental units are fully deductible since the apartment is not owned.

The same is true if your client may have to pay medical expenses for a dependent besides a spouse, like a parent, child or other qualifying relative.

11. Opportunity Cost

A big issue for both clients and financial advisors is assessing the opportunity cost of paying tax up front. The argument is that the funds that were used to pay Uncle Sam could have been invested. That’s true, but the invested funds could also have produced losses. Let’s say, based on the investment, you could have reasonably projected a return and that opportunity is now gone because the funds were used to pay the tax.