Big Fans of the Roth IRA

We are big fans of the Roth IRA.  Who wouldn’t like a pot of money that is tax free?  There are two ways to set up a Roth IRA.  First, make contributions from your annual earnings from wages or business income.  Just follow the Traditional IRA contribution rules allowing up to $6,500 contribution each year (see your tax advisor for your amount).  Second, convert your traditional IRA to a Roth IRA in any amount that you choose.  The only downside is you must pay the income tax on the amount converted.

Now that you have your Roth set up, you will never pay tax on the original contributions or the growth, either!  This can be a wonderful deal for those who believe their tax rates will be the same or worse in the future.  It is also great for those who do not want to have to take money out of their IRA as Required Minimum Distributions after age 70.5.  The Roth can help reduce your income taxes on social security benefits too.  This can be a huge benefit.

One thing I have never heard discussed, or seen written about, is the one downfall to Roth IRA’s.  That is the fact that Roth IRAs are not protected from long-term care costs.  So….all that for nothing?  You set yourself up to be a taxman, then whammy!  Nursing home costs come along and swallow up your Roth IRA with a “giant sucking sound.”

I have an idea.  Why not take the Roth IRA and transfer it into an irrevocable pure grantor trust.  You can invest it the same way you would in a Roth IRA.  You can still live off the income stream.  Presumably that would include a low-tax investment portfolio, anyway.  Now, once the money has been in the trust for five years, it is protected from the nursing home costs.  You get low taxes, which is almost as good as no taxes.  And, you have protected 100% of the pot.  Better than possibly losing 100% to nursing home costs.  Think it over, but don’t overthink it.

Category: Coach's Corner