Help Me Make a Financial Decision

[katwoman]

There are some upcoming medically related expenses that my mother will incur. Anywhere from 7k-10k for the year 2006. I need advice as to the best place to get the funds.



Here's my dilema:

She has a traditional IRA worth 20k getting regular bank interest. She's already taken her 2006 distribution for $1100. Should I take the money she needs from here? What kind of tax would she incur? Is it worth it?

She has a sizeable securities portfolio made up of 3 stocks. Two of the stocks were bought so long ago (dividends have been reinvested along the way) that there is no cost basis. The third stock was bought only a couple of months ago (25k) and is now worth 33k. A sale of any security would trigger a capital gains tax.

Her home is mortgage free. A HELOC?



As it stands, she pays no taxes, yet.

I'm torn because I've always wanted to move her IRA to a brokerage and invest the funds in securities without worrying about taxes. I also know that the IRA can be inheirited (I have a brother) and allowed to continue investing but don't know the details as to when those funds must finally be distributed. Another thing was if we should bother converting this traditional IRA over to a Roth.

Please make some compelling arguments because I've got to get this past my bro and he HATES owing money to anyone while I like unimpeded growth!

[34saving]

I'm a big time NON-EXPERT in this area but nationaladademies.org (after a Google search) had this to say and it kind of agrees with what I think I know:

"IRA ASSETS

All traditional IRAs (and other qualified retirement plans) are eventually subject to income tax. These taxes come due when the assets are inherited by a beneficiary other than the surviving spouse. Thus, the real value of a $100,000 IRA to an heir in the 28% tax bracket might be $72,000.

STOCK

When inheriting stock (or other real property) which has increased in value, your heirs receive the benefit of a “step-up” in the cost basis of the asset. In effect, all the gains amassed during the your lifetime are free from capital gains tax. Thus, your heirs receive the full value of $100,000 worth of stock.

(Note that if the stock has lost value since purchase, you should give it to you heirs during your lifetime, allowing them to keep the cost basis intact and potentially declare a tax loss. More information on maximizing depreciated stock is available here.)"

So, assuming your mother is old enough, she should probably take the money out of the IRA? (Especially since it's not earning very good interest anyway and her medical expenses should be tax deductable.) Oh, I just read that even if she's not old enough, qualified medical expenses in excess of 7.5% AGI can be removed from an IRA without penalty.

[katwoman]

Mom is 80 y.o.

Didn't know that about the stocks and the cost basis at inheiritance.

As for the traditional IRA info - that's why I had considered converting it over to a Roth and letting mom take small tax hit here (and hopefully offset by the medical expenses). To allow for the continued tax free investment over the course of my and my bro's lifetime. As you can tell, this is the way I personally would want to go.

[Tightwad Kitty]

Originally Posted by katwoman

Mom is 80 y.o.

Didn't know that about the stocks and the cost basis at inheiritance.

As for the traditional IRA info - that's why I had considered converting it over to a Roth and letting mom take small tax hit here (and hopefully offset by the medical expenses). To allow for the continued tax free investment over the course of my and my bro's lifetime. As you can tell, this is the way I personally would want to go.

I don't know much about the US tax but I would do want's best for your Mom. IRA option sounds the best option at this time even if she has to pay tax on it. Sell the stock if and then need arises for her comfort and needs at that time. All the best for you and your mother, I hope she is better soon.

[flash]

Originally Posted by 34saving

I'm a big time NON-EXPERT in this area but nationaladademies.org (after a Google search) had this to say and it kind of agrees with what I think I know:

"
STOCK

When inheriting stock (or other real property) which has increased in value, your heirs receive the benefit of a “step-up” in the cost basis of the asset. In effect, all the gains amassed during the your lifetime are free from capital gains tax. Thus, your heirs receive the full value of $100,000 worth of stock.

But the inheritance itself still falls under estate taxes...where as the IRA is different. I'm not an expert at the "death tax" yet (coming too soon for me too, katwoman) but I would look into it.

[katwoman]

Right now, we're OK as far as estate taxes are concerned. We're still under the threshold.

[Bluezy]

What portions of her medical expenses will be covered under Medicare Part A and the new Part B? Does she have private Medicare supplement insurance?

Since the medical expenses are upcaoming, I'd look into some creative financial planning to save your mum from as much extra incurred expense as possible.

[katwoman]

These expenses are above and beyond what Medicare A & B and a supplement cover.

Here's the breakdown:

$3100 for Long term care premium
$4000 for the 30 day elimination period on the LT policy
$1900 for total out of pocket costs on the supplement (she was hosptialized this year, but I'm not really sure of this policy, so maybe more $$$)
$750 for the supplemental premium
$$$???- medications (no Medicare D; She's on some patient assistance programs for the really expensive meds while the cheap meds are really very cheap. Personally, I can't see going over $1000 for this category.)

There's also Medicare's deductible to figure in as well as other related expenses for day to day stuff.