How to avoid RMDs

[sol]

My FIL is having problems with his traditional IRA making required minimum distributions that put his income above the threshhold for veteran's medical care.  His pension and SS are fine, it's just the new RMDs that are causing the problem.

Since this is a traditional IRA I think he can just convert the money to a Roth IRA.  The Roth doesn't have RMDs and the money would still be available to him whenever he decided he wants it.  And without the RMDs, his income would drop down to a level that would still entitle him to his veteran's benefits.

Am I missing something?  This feels like a super obvious solution to me and I feel like his accountant or even his IRA manager should have suggested this to him in the first place.

It's not entirely clear to me what portion of his tradIRA will be taxable upon conversion.  That will probably depend on how much was deductible going in.  It's also not clear to me if the amount of the conversion, if it is taxable, would count as his RMD for the year. 

Any advice?

[Frankies Girl]

My mom is going to be facing this in 2015, and the way I understand it, the converting to Roth would require a pretty big tax payout if the IRA is of any significant amount. I wasn't aware that any of a traditional IRA (thought all money put into it was tax-deferred) would be exempt from taxation - so whatever is converted is what you'll have to pay taxes on? That would maybe explain why your FIL's tax guys haven't suggested doing this since it could potentially mean tens of thousands of dollars in taxes.

And from what I've read so far, the RMD is absolutely separate from any conversion, so they can't count a conversion as his RMD and if he does do both,  he will owe taxes on both.

I wish like anything I'd known about converting traditional to Roths about 10 years ago, as I could have gotten my mom going on this and she'd not be in the same state if she had more time to convert over. :(

[Johnez]

What about a partial conversion?  Just roll over enough so the RMD doesn't bump him out of his veterans benefits.

[Zamboni]

^Maybe that will work?

Not sure if this is helpful or not that this point:
https://personal.vanguard.com/us/insights/article/ira-insights-rmd1-092014

[mxt0133]

If you FIL is already required to make RMDs then his only option to qualify for veteran's medical care is to take out the lump sum amount of this tradIRA for one year, pay a whole lot of taxes, and then the following year his income will drop down again to qualify. 

Any amount you take out of a traditional IRA is taxable income, funds that are put there are tax deferred and any income or appreciation is treated as taxable income as well.  There is "portion" that is taxable, it is all taxable coming out.

That is why a Roth conversion for a traditional IRA is suggested for early retirees, because you will be in a low tax bracket, the conversion amount will hopefully not be taxed or taxed at a lower rate than if you would have not put it into the IRA.

The good news is that your FIL seems like he has enough income that he can afford Medicare and some type of supplemental health insurance problems.  Once his trad IRA funds are depleted he can then qualify for veteran's medical plan again.

[Undecided]

Any amount you take out of a traditional IRA is taxable income, funds that are put there are tax deferred and any income or appreciation is treated as taxable income as well.  There is "portion" that is taxable, it is all taxable coming out.

No, that's not true. See Form 8606 and consider the information regarding basis. Although it's become less common to see continuing non-deductible IRAs since the income ceiling was removed for persons converting IRAs to Roth IRAs, for many years persons above the income ceiling for deducting IRA contributions could and often did make contributions to IRAs, producing IRAs with basis that was not taxed at withdrawl.

[KMB]

To avoid negative tax consequences from RMDs my parents are planning to create an educational trust for their grandchildren. They've told me that withdrawals from the IRA that are used to fund the trust are a tax free event.

[Undecided]

To avoid negative tax consequences from RMDs my parents are planning to create an educational trust for their grandchildren. They've told me that withdrawals from the IRA that are used to fund the trust are a tax free event.

I'd be interested in hearing the basis for this.

[Catbert]

If we are talking about a relatively small amount of money to get him below the threshold, you can have your RMD sent directly to a charity.  I "assume" you could do this with a partial distribution.  I'm not sure if this keeps it from being counted on your tax return.  Maybe worth investigating.

[mxt0133]

Any amount you take out of a traditional IRA is taxable income, funds that are put there are tax deferred and any income or appreciation is treated as taxable income as well.  There is "portion" that is taxable, it is all taxable coming out.

No, that's not true. See Form 8606 and consider the information regarding basis. Although it's become less common to see continuing non-deductible IRAs since the income ceiling was removed for persons converting IRAs to Roth IRAs, for many years persons above the income ceiling for deducting IRA contributions could and often did make contributions to IRAs, producing IRAs with basis that was not taxed at withdrawl.

I stand corrected, thank you.  I did not consider non-deductible contributions.

[KMB]

To avoid negative tax consequences from RMDs my parents are planning to create an educational trust for their grandchildren. They've told me that withdrawals from the IRA that are used to fund the trust are a tax free event.

I'd be interested in hearing the basis for this.

I was never 100% certain of this strategy, and when I looked into it further it turns out there doesn't appear to be an option to do this without first paying taxes on your withdrawals. Glad I looked into it further, hopefully I can guide them in a different direction...