February 04, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
Quinn in Cincinnati: When does it make sense to do a Roth conversion? I have about $30,000 in an IRA, but I’ve been thinking about converting that money to a Roth. I’m 42.
Answer: Deciding on whether to a do a Roth conversion is a big decision since taxes are involved.
First, understand the basics of what a “conversion” means. With a traditional IRA like you currently have, you probably funded it with pre-tax dollars. This means you haven’t paid taxes yet on any of that money. However, a Roth IRA is funded with after-tax money (money you have paid taxes on). That account then grows tax-free. So, the government is going to want its cut if you’re converting pre-tax money to after-tax money.
(Currently, there are no income limits on converting your IRA to a Roth, however, there are income limits for contributing to that Roth account.)
The big question you need to answer when deciding if you want to convert your IRA is if you think your taxes will be higher in retirement than they are now. If you feel as though your taxes will only go up as you get older, it may be a good time to convert your account to a Roth IRA since you’re “locking in” a lower tax rate. If you feel as though taxes will be lower when you retire, it might make sense to keep the money in your traditional IRA.
Another question to ask: Can you afford to pay the taxes on this conversion? And where will the money come from? If this isn’t something you’ve prepared for you, this could end up being a large chunk of change. If the only money you have to pay the tax bill is coming out of the account itself, we don’t recommend a conversion – the money should come from a different source.
The Simply Money Point is that a decision like converting an IRA to a Roth IRA really depends on your specific financial situation. But, given that tax reform has just lowered tax rates, it could make sense for you right now. Just make sure you really want to do the conversion because you’re no longer allowed to “undo” this move.
Angela from Ft. Thomas: My parents are 69 and 71. Is it too late for them to buy long-term care insurance?
Answer: Long-term care insurance coverage can help pay for costs related to a disability, chronic illness, or other condition that requires assistance for a short or extended period of time. The majority of employer-sponsored insurance policies will not cover these services, and neither will Medicare. In order for Medicare to do so, there must be extreme circumstances that may vary by case.
When issuing a long-term care policy, insurance companies charge a premium based on your health and age. The younger and healthier you are, the less your premium will be. So, based on your parents’ age, insurance companies may not even consider them.
Also, be aware that the long-term insurance industry itself is struggling. Only about a dozen or so insurers still sell the coverage, which is down from about 100 insurers just 20 years ago. This means for those who already have coverage, premiums will probably go up. And for those still thinking of buying a policy, they’ll run into less choice, less coverage, and more cost. So, in many cases, a long-term care policy isn’t even a viable option.
What are your parents’ options? They could “self-fund” future healthcare costs through their savings and investments. A good way to see if they’re able to do this is to have them work with a trusted financial planner (we recommend a Certified Financial Planner™) to develop a personalized financial plan.
Another option may be Medicaid. If your parents are eligible, they could receive a daily allowance for their long-term health needs. However, they must prove they have limited to no assets to pay for their own care.
As a word of caution, your parents should be skeptical of “hybrid” insurance products that combine long-term care insurance with life insurance. In most cases, this type of product will hide the true cost by mixing it with a death benefit. If the long-term care coverage they need is too expensive in a stand alone long-term care policy, mixing it with life insurance won’t make it any cheaper – but it will certainly be harder to understand.
The Simply Money Point is that your parents could potentially qualify for long-term care insurance; however, given their age, the premium payment might be more than they can afford. They should probably look at alternative options.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org.