Smarter Retirement Planning: Balancing Roth Conversions, Taxes, and Long-Term Care
Retirement is supposed to be the reward for a lifetime of hard work but managing money after your final paycheck can be just as complex as earning it. From Roth conversions and long-term care insurance to capital gains and healthcare savings, the financial decisions retirees face can dramatically affect their comfort, tax liability, and legacy. A recent financial advice discussion highlights how retirees can optimize these decisions for stability and peace of mind.
A retired couple, ages 69 and 67, offered a relatable example. With less than $2 million in assets and about $100,000 in annual fixed income from Social Security and pensions, they face annual expenses of around $110,000, including taxes and occasional large purchases. Their portfolio includes $150,000 in a brokerage account, $400,000 in pre-tax retirement funds, and $850,000 in a Roth IRA. The couple is weighing whether to continue Roth conversions at their current 22% tax bracket, mindful of how future Required Minimum Distributions (RMDs) and Social Security taxation could increase their tax burden later. This decision is one many retirees face: balancing immediate tax costs with long-term benefits.
Long-term care insurance is another major consideration. The couple holds a traditional policy covering half of potential nursing home expenses, adjusted annually for inflation. They’re now debating whether to maintain this coverage or self-fund care. The discussion pointed out that traditional long-term care policies can protect assets but may carry rising premiums. Asset-based policies those combining life insurance or annuities with long-term care coverage offer an alternative, often providing more flexibility and a guaranteed benefit to heirs. The goal, ultimately, is to ensure both spouses remain financially secure, even if one requires extended care.
Understanding the rules around Roth IRAs is essential for avoiding costly mistakes. Contributions to a Roth IRA can be withdrawn at any time, but earnings are subject to the five-year rule meaning they can only be withdrawn tax-free if the account has been open at least five years or if the owner is over 59½. Each conversion starts its own five-year clock, although once a person turns 59½ and has held a Roth IRA for at least five years, withdrawals are fully tax-free. The same principles apply to Roth 401(k)s, but with an added layer of complexity each employer-sponsored plan has its own five-year clock until funds are rolled into a Roth IRA. Once rolled over, the Roth IRA’s timeline takes precedence.
The discussion also covered an interesting retirement plan option: purchasing additional service credit. In one example, a $45,000 lump-sum payment could increase lifetime pension income by $12,000 annually. Using the 4% withdrawal rule, generating that same $12,000 through investments would typically require $300,000 in assets. That means the internal rate of return on the pension credit purchase is extremely favorable a reminder that not all investments are found in the stock market.
Taxes play a huge role in retirement strategy, especially when it comes to capital gains. For retirees, understanding the thresholds for tax-free gains is critical. Long-term capital gains are completely tax-free up to $48,000 for singles and $96,000 for married couples. Beyond those limits, gains are taxed at 15% until incomes exceed roughly $533,000 for singles and $600,000 for couples. The strategy of “tax gain harvesting” intentionally selling investments to capture gains while staying within the tax-free bracket can help retirees rebalance portfolios and reduce future tax burdens.
Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) also play a key role in managing healthcare costs efficiently. HSAs offer a powerful combination of tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified expenses. When changing jobs, it’s smart to max out HSA contributions before switching to an employer offering an HRA. While HRAs don’t allow direct contributions, they can cover medical costs, freeing the HSA to continue compounding as an investment. Savvy savers often keep receipts for unreimbursed medical expenses to make tax-free HSA withdrawals later in retirement.
The bottom line: retirement planning is not about one big decision it’s a series of coordinated moves that protect income, manage taxes, and prepare for future healthcare needs. By combining smart Roth conversion timing, strategic tax management, and intentional healthcare planning, retirees can ensure their money lasts as long as they do.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
