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While rolling over funds can translate into tax-free income available down the road, you also pay taxes on the amount moved—which means no future opportunity to reduce that rate further.

Medical expenses—often more a factor for retirees—can be taken as an itemized deduction, if you have taxable income to count it against. CNBC’s recent article, “Before moving all your IRA money to a Roth, consider these lost tax benefits,” advises that if you regularly give money to charity, so-called qualified charitable distributions sent directly to the charity from a traditional IRA are excluded from your taxable income. However, if you’re planning to move all your assets from a traditional individual retirement account to a Roth version, hold up a second.

Roth IRAs grow tax-free and withdrawals are untaxed. They also have no lifetime required minimum distributions (RMDs). Traditional IRAs have some potential tax benefits that are lost for future use, once the money is moved. If you can lower your taxes, you may want to keep some of your money in a traditional IRA. Those tax benefits generally relate to medical expenses, charitable contributions and business losses.

When you roll over money from a traditional IRA to a Roth, the amount moved is taxed as ordinary income. This is best done when you’re in as low a tax bracket as possible. While the strategy means tax-free income available down the road, it also means you’ll have already paid taxes on the rollover. As a result, there’s no chance to reduce the rate further. However, if you leave too much in the IRA, the result may not be in your favor (i.e., higher RMDs and taxes).

A tax break for medical expenses is one of the few remaining deductions available to people, since the new tax law took effect last year. While it’s limited to the amount that exceeds 10% of your adjusted gross income, and you must itemize your deductions to take advantage of it, people with high medical bills can potentially decrease their tax bill by using it. However, to take the deduction, you must have taxable income to weigh it against. This means that if much of your income is tax-free because it is from a Roth IRA, you could be limited in whether you can take advantage of the break.

However, if you took money from an IRA—whose withdrawals are taxed as ordinary income—to cover those health costs, you could use the medical deduction against that withdrawal. That could result in paying less in taxes than what you would have paid by rolling that money to a Roth.

If you give money to charity each year, keeping money in your traditional IRA to make those donations could be worthwhile. Contributions made through so-called qualified charitable distributions—funds sent directly to the charity from a traditional IRA—are excluded from your taxable income. However, the tax break for charitable contributions (like the break for medical expenses) can only be used if you itemize your deductions. Typically, a deduction is not as valuable as an income exclusion.

Reference: CNBC (October 7, 2019) “Before moving all your IRA money to a Roth, consider these lost tax benefits”

Suggested Key Terms: IRA, Roth Conversion, Required Minimum Distribution (RMD), Charitable Donation, Medical Deduction