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"Planning to move to a retirement community which comes with "buy-in" of $400K."

My Uncle Bill moved to such a place at age 90. He was still driving but his circle of friends had dropped tremendously, and his house, now about 80 years old, was in a deteriorating neighborhood - seriously.

He got 2 meals a day. Had a one bedroom apartment with small kitchen area in the living room. Maid service once a week to clean the place. Laundry done. Swimming pool and other activities. He liked it. At that point in his life, he was in good shape - but of course, not traveling. Hadn't been in 30-40 years. His wife had died five years earlier.

He survived another 4 years...with the last 3 months in the nursing home part of the community as he went downhill quickly at age 94.

When/if I get to be 90, I'll consider something like that. Maybe at age 80. Who knows? So far I'm in decent shape able to travel, cook, keep the house going, shop, etc.


t.
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One of the ideas is to withdraw from taxable/IRA/Roth money in equal amounts to evenly spread out taxes compared to the "common wisdom" of drawing down taxable, then (regular) IRA, and lastly Roth money. Here's what I've been wondering:
Does it pay to "bite the bullet" tax-rate-wise for one or two years and re-characterize regular IRA money to Roth? The benefits would include much lower tax rates later, and if you did the bite-the-bullet move prior to Medicare eligibility and prior to taking Social Security, you could still have a high income from the Roths but not have a high *taxable* income such that your SS money wouldn't be subject to federal income tax.

Am I missing something? Has anybody done what I suggested?
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Does it pay to "bite the bullet" tax-rate-wise for one or two years and re-characterize regular IRA money to Roth? The benefits would include much lower tax rates later, and if you did the bite-the-bullet move prior to Medicare eligibility and prior to taking Social Security, you could still have a high income from the Roths but not have a high *taxable* income such that your SS money wouldn't be subject to federal income tax.

Am I missing something? Has anybody done what I suggested?


It makes sense now especially because, by the current law, tax rates will increase in 2026. Tax Cut 2.0 may change that, but you will probably get a better sense if Tax Cut 2.0 will be enacted in a few weeks, after the election.

I am going to be doing some conversions in December, when I have a better idea of my income.

AJ
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I am going to be doing some conversions in December, when I have a better idea of my income.

Me too. Need to stay in the bracket which gives me a 0% tax rate for LT gains.

It's extremely important NOW to not convert too much and inadvertently move into a higher bracket since conversions can no longer be re-characterized.

Bob
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"I am going to be doing some conversions in December, when I have a better idea of my income."

Me too. Need to stay in the bracket which gives me a 0% tax rate for LT gains.


It's a game where--if you are successful--quickly comes to a screeching halt. After a few good years, it's likely that your total income will push you over the various thresholds. Speaking from experience.
Oh, and if you are smart, you sell (and immediately re-buy) some of your LT stuff to realize the gains while you can get the 0% rate. Call it Tax Gain Harvesting. Kinda the flip side of Tax Loss Harvesting.


As I see it, the biggest advantage of Roth conversions is that it lets you slip more money into the Roth -- the tax you paid on the converted amount. But when you look at the total money-flow over several years, there isn't really much of a difference if you convert or not. The govenment IS going to get tax money from you, and it isn't particularly important to them whether it's 5 years sooner or 5 years later.

I converted religiously the first few years after I retired, maxing up to the top of my tax bracket just like everybody says to do. Then when I began to make withdrawals it hit me that I was just withdrawing money from the Roth that I had tranferred there from the IRA just a few years ago. So the money came from the IRA anyway, it just made a side-trip through the Roth. What's the point?
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What's the point?

The point, as I see it, is that the tax rates are lower now than they will be in the future, and that seems to be a temporary thing. I think that may be the difference between now and when you did it as the tax rates were the same year over year, so in your case, you seem to have pushed the taxes later.

I'm not sure that will be the same case now, but of course, my crystal ball is hazy on what other tax changes may come down the road.

I am in the camp of doing some conversions from traditional IRA to Roth to pay the taxes sooner and at a lower rate, but I haven't looked at the numbers in my case yet as this is not something I would do until next year. I did retire this year, but we have half a year of income from me, and that makes a significant difference. Should be interesting to see what the tax numbers look like next year when my income is missing, but I do expect it will make financial sense for us to do the conversions.

That's actually one of the questions I have for our Financial Planner when we meet with him at the end of this year. I'd like to get his opinion as well with the new tax laws.

Time will tell.
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Tax-savvy withdrawals in retirement
https://www.fidelity.com/viewpoints/retirement/tax-savvy-wit......

</snip>


Another article that isn't very meaningful to older retirees. The proposed withdrawal strategy only seems to be a valid withdrawal strategy for those that retire early and have roughly equal amounts of their investments in taxable, tax-deferred, and tax-exempt accounts. In addition, the withdrawal strategy assumes that one uses the withdrawals for current living expenses.

Once you reach 70-1/2 and you are required to make RMD withdrawals from your tax-deferred accounts, can you continue to make equal withdrawals from taxable, tax-deferred, and tax-exempt accounts as shown in the article's graphic?

If you have 401(k), 403(b), etc. retirement accounts or their Roth equivalents, you must withdraw the calculated RMD from each account. If you have multiple traditional IRA accounts, your RMD calculated for each account can be combined and taken from the accounts that you select. Roth IRA accounts aren't subject to RMD withdrawals.

Perhaps I have trouble seeing the validity of the article's withdrawal strategy because I was never eligible to open a Roth IRA account while employed and my traditional IRA accounts were too successful. My RMD exceeds $100K annually and Social Security plus two small pensions exceeds my living expenses. As a result, the RMD withdrawals are simply transferred to a taxable investment account and invested for the future.
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One of the ideas is to withdraw from taxable/IRA/Roth money in equal amounts to evenly spread out taxes compared to the "common wisdom" of drawing down taxable, then (regular) IRA, and lastly Roth money.

First off, that particular "common wisdom" idea is just plain stupid. I'm going to give it a new name: "common stupidity".

Does it pay to "bite the bullet" tax-rate-wise for one or two years and re-characterize regular IRA money to Roth?

Probably not. But let's see if we can figure it out.

Rather than spout some easy to follow, but probably wrong for most people, rule of thumb, let's look at a short process. But it involves planning ahead. You could try to plan for multiple years (not a bad idea when you're trying to decide if you can retire), but you can do just fine looking ahead one year at a time.

The first question: What do you need/want to spend next year? All the typical budgeting stuff - housing, utilities, insurance, food, clothing, whatever. Throw a reasonable number at income taxes (last year's tax bill will do), but we're going to see if tweaks to that are necessary or helpful.

Give a quick thought to things that may be 2 or 3 years down the road. Are you coming up on a 50th anniversary where you'll want to throw a big party or take an around-the-world cruise? You might save a little in taxes if you withdraw a little extra for a couple of years rather than all of it in one year.

Now, where is that going to come from? The usual suspects are Social Security, pensions, annuities, and withdrawals from your accumulated savings. It's that last one we're going to look at.

It's OK to start with a baseline of equal withdrawals - or better yet - equal percentages from each of your types of accounts. I'll stick to 3 kinds of accounts here - tax deferred (IRA, 401k, 403B), tax-free (Roth IRA or 401k), and after-tax (regular investment accounts). But you can add or subtract accounts as you see fit. And don't forget that some accounts may have required withdrawals, so you can't drop below those minimums.

With all of this info, it's time to do some tax planning. Use whatever tool you are comfortable with (pencil and paper, tax software, spreadsheets, consulting your tax professional) to figure out what your taxes would be with the currently planned withdrawals and deductible expenses. Don't forget state taxes, if any.

Now, take a close look at tax brackets. Are you just over or just under one? Could you adjust your withdrawal plan (a bit more from one account, a bit less from another) to change that and make it better? Would a conversion from traditional to Roth make sense?

Keep in mind that ultimately your withdrawals will need to be in proportion to the balance of the accounts. If you're taking all of your living expenses from Roth accounts, you're going to run out of Roth money eventually. (Unless you have way more money than you need for retirement.) You also want to remember that the current tax law has a standard deduction (or itemized if that's bigger), so you want to use that up with your withdrawals. That's basically tax-free money out of taxable accounts.

Loop back around as needed until your are comfortable with the results. Remember that the goal here isn't perfection. The main goal is to avoid major mistakes and missed opportunities. There is almost certainly a fairly wide range of answers which are all basically the same.

--Peter
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We have a little different issue. Planning to move to a retirement community which comes with "buy-in" of $400K. We don't have that kind of cash available without touching the IRA's, so I am thinking to start a withdrawal program of $74,000 a year which would incur a 22% max tax. Or maybe take $320,000 and pay 24%. Gets the pain out of the way sooner and avoids potential rate hikes. I will put the money in a taxable account until needed for the move.

Comments?

CNC
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Does it pay to "bite the bullet" tax-rate-wise for one or two years and re-characterize regular IRA money to Roth? The benefits would include much lower tax rates later, and if you did the bite-the-bullet move prior to Medicare eligibility and prior to taking Social Security, you could still have a high income from the Roths but not have a high *taxable* income such that your SS money wouldn't be subject to federal income tax.

Am I missing something? Has anybody done what I suggested?


Our traditional IRAs greatly outnumber the amount of money we have in both cash and Roths. We have retired in our 50's and are putting off taking pensions til mandatory at 65 and SS at 70 for DH, full retirement age for me. Starting next year we are going to max out Roth conversions up through the 24% tax rate, paying taxes on conversions with money market funds. These funds were put into TIRAs at a higher tax rate than 24%.

We decided on this process by looking at what RMDs would be if we did nothing, using current tax law. I took the balance of our IRAs and applied a conservative 4.5% annual return to see what the balance would be at 70.5. I looked at what our retirement income ex RMDs would be at 70.5 and figured the base tax on that, calculating both the income and taxes on both of us living and on survivorship basis if DH passes. This is income I have no option to change and stands at a tax rate of minimally 25% MFJ and 28% single. I then looked at how high the RMDs would be if we did no conversions and looked at what the tax would be on that. RMDs are the only retirement income I have the ability to manipulate somewhat via conversions.

From this I concluded that anything we could convert up through the 24% tax bracket would be a good deal, and we may need to consider a higher tax rate conversion down the road, but one year at a time. If we make more than 4.5% return then converting now makes an even better deal. If I pass away before DH then it's even more critical that we do these conversions, because his income will be higher than mine if he were to pass first. And Ray it's likely that our kids will inherit our Roths, not that we will draw them down. Between the Roths and our regular investments which should receive a step up in basis when we die, we can lower the tax impact on them.

Everyone's numbers are different, and married couples should consider the change in tax rates on RMDs in the event that something happens to one of them and they go from filing MFJ to single.

IP
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". My RMD exceeds $100K annually and Social Security plus two small pensions exceeds my living expenses"

****************************************************************

Congratulations!!!!!!
I believe that condition is called success!

Howie52
Recognizing when worrying is really critical and when it is merely a
response to "sub-optimal" situations is one of the keys to a happy
retirement.
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<<My RMD exceeds $100K annually and Social Security plus two small pensions exceeds my living expenses. >>>


It looks like I'll be in the same situation at age 70-1/2. My only regret is that I didn't retire a few years earlier, like maybe by 35 instead of 38.

intercst
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"<<My RMD exceeds $100K annually and Social Security plus two small pensions exceeds my living expenses. >>>


It looks like I'll be in the same situation at age 70-1/2. My only regret is that I didn't retire a few years earlier, like maybe by 35 instead of 38.

intercst "

*******************************************************

Worrying about the past does not provide a great return. Be happy
about your successes.

Congrats to you for doing so well.

Howie52
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Howie52 writes,

<<My RMD exceeds $100K annually and Social Security plus two small pensions exceeds my living expenses. >>>


It looks like I'll be in the same situation at age 70-1/2. My only regret is that I didn't retire a few years earlier, like maybe by 35 instead of 38.

intercst "

*******************************************************

Worrying about the past does not provide a great return. Be happy
about your successes.

</snip>


It's not a source of worry, but it might be a useful data point for someone who's already saved more than enough, and isn't thrilled with continuing to work.

As the old saying goes, "I've never met anyone who wished they'd spent more time in the office."

intercst
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"It's not a source of worry, but it might be a useful data point for someone who's already saved more than enough, and isn't thrilled with continuing to work.

As the old saying goes, "I've never met anyone who wished they'd spent more time in the office."

intercst "

*******************************************

The trick of work is to enjoy what you are doing when you are doing it.
So, enjoy the people you work with and the folks you work for - and do
not annoy them any more than is absolutely necessary.

Howie52
Who was not always successful in the annoying part.
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I converted religiously the first few years after I retired, maxing up to the top of my tax bracket just like everybody says to do. Then when I began to make withdrawals it hit me that I was just withdrawing money from the Roth that I had tranferred there from the IRA just a few years ago. So the money came from the IRA anyway, it just made a side-trip through the Roth. What's the point? - Rayvt

---------------------

One disadvantage of leaving it in the TIRA is that any dividends end up being taxed as ordinary income.
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Or maybe take $320,000 and pay 24%. Gets the pain out of the way sooner and avoids potential rate hikes. I will put the money in a taxable account until needed for the move.

Comments?

CNC


------------------

Why not park the money in a Roth until needed? Taxes are the same coning out of the TIRA, but any growth or income produced by the withdrawn money will be tax free.

That is what I am doing, converting some TIRA to Roth each year while trying to spend down my after tax accounts to near zero. I don't see any reason to have a large after tax account in retirement when a Roth can serve the same purpose without the tax drain.
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bhm: Why not park the money in a Roth until needed? Taxes are the same coning out of the TIRA, but any growth or income produced by the withdrawn money will be tax free.

Same deal. Can only take so much a year without getting into a too-high tax bracket. And, yes, a Roth conversion would make more sense than going to a taxable account, where future appreciation would be taxable.

CNC
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bighairymike,

You wrote, That is what I am doing, converting some TIRA to Roth each year while trying to spend down my after tax accounts to near zero.

Bear in mind that this could be suboptimal too. Taxable accounts don't mean tax-free. If you've held investments for a long time, you could be sitting on substantial capital gains. The capital gains tax rate for a couple filing MFJ is 0% until you have more than $101,200 in your AGI. You may want to take advantage of that later in life.

Also assets you pass through your estate receive a stepped-up cost basis, so your heirs can avoid taxes on your estate as well.

So depending on what you have in the accounts, you might want to be careful about what taxable assets you spend down and when...

And FWIW, I'm kind of in the same situation. Currently about 40% of my investable assets are taxable. And that doesn't include my home equity - which I'll probably liquidate after I retire. I've always assumed I'll draw down my taxable assets first when I retire. But as I get closer I'm thinking it's not so simple because I'm sitting on a fair amount in unrealized capital gains.

- Joel
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Bear in mind that this could be suboptimal too. Taxable accounts don't mean tax-free. If you've held investments for a long time, you could be sitting on substantial capital gains. The capital gains tax rate for a couple filing MFJ is 0% until you have more than $101,200 in your AGI. You may want to take advantage of that later in life.

Also assets you pass through your estate receive a stepped-up cost basis, so your heirs can avoid taxes on your estate as well.

So depending on what you have in the accounts, you might want to be careful about what taxable assets you spend down and when... - Joel


-------------------------------

All good points Joel. In my case my after tax accounts do not carry that large of an unrealized cap gain component. And I have a large capital loss carry forward from the 2008 debacle that will shelter most if not all of those gains. Like someone (IP I think) said in this thread, all of these ideas are just food for thought and everyone needs to run their own numbers.
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From this I concluded that anything we could convert up through the 24% tax bracket would be a good deal, and we may need to consider a higher tax rate conversion down the road,

Are you paying taxes out of part of the IRA withdrawal, or from another source?
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Are you paying taxes out of part of the IRA withdrawal, or from another source?

Money market. We realized a bunch of options before DH left work and kept the money in cash for this purpose, as well as because I really did not feel like putting more money into the market at these levels when it would be needed in a relatively short time.

IP
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We have a little different issue. Planning to move to a retirement community which comes with "buy-in" of $400K. We don't have that kind of cash available without touching the IRA's, so I am thinking to start a withdrawal program of $74,000 a year which would incur a 22% max tax. Or maybe take $320,000 and pay 24%. Gets the pain out of the way sooner and avoids potential rate hikes. I will put the money in a taxable account until needed for the move.
===============================
First, before doing too much more analysis, find out how much of that front-end "buy-in" is deductible as a medical expense for prepaid long-term care. Because usually some of it is, including graduated-care type places where you can start out in an independent living unit, and as your needs increase, move to assisted living and/or full nursing care. The institution will often have had a formal actuarial analysis done to support the deductible percentage.

The point to consider is that the more the medical deduction, the more of that you can cover with traditional IRA distributions, with no need to do conversions to avoid tax.

Bill
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Wradical: First, before doing too much more analysis, find out how much of that front-end "buy-in" is deductible as a medical expense for prepaid long-term care.

Interesting thought. Thanks. Will check.

CNC
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Planning to move to a retirement community which comes with "buy-in" of $400K.

My parents moved into one of these and frankly Mom loved it while Dad tolerated it and even at times praised the management for the first year or so. It was an independent facility, not one of the large corporate chains, and they were treated like the adults they were in independent living. But after a while one of those corporate chains bought the place and while their contractual terms remained the same, things like fees and limits on increase of fees, the new company started treating them like children and placing endless small new fees on things not covered by the contract. Dad's ability to make decisions for himself was being taken over by the corporation. Small things like if one did not come down to dinner your spouse could not bring a plate back to your apartment for you. One of the high school staff had to do it and there was a fee. Or if there was an event that you were participating in, like going to the symphony, it was mandatory that you take the facility shuttle and could not drive yourself. And you now had to pay for your food at the dining hall whether you ate there or not. My parents were still traveling at the time and used to be able to put their dining contract on hold for so many months out of the year with the original management. Even though I pointed out if he was visiting us we were not charging him for his food, paying for something he was not using was so against his nature that this change now kept them at home and they sold their motorhome. Drove Dad nuts and he eventually decided to leave, though in full disclosure I am not so sure Dad wasn't already going a bit crazy. Mom had had her stroke by then and was mentally compromised in the process. As one loses control over things like health it's all the more important that they are left with control over the little things, something this management was eroding with their arbitrary rules that were put in place to bring in more fees. The facility kept half of the buy in as per contract.

I visited a couple of times with young kids, staying with them in their 2 bedroom apartment and eating in their dining room with them. It was insane to me how sugar and carb based their meals were. I once read someone state that "sugars are the opiates of the elderly", and indeed it is one of the abilities to taste they lose last, but it is not optimal for one's health. Then again, these companies do better when there is turnover in the apartments. A new buy in, higher base fees, all work well in their favor and since there tends to be a wait list there is no difficulty filling units. It is not in the company's best interest that you live to an old age.

Think hard about what changes might be made after you agree to move in and know what it would take to leave if it turns out you don't like living there. I've been told I am my father's daughter. I doubt I could live in such a place.

YMMV, but something to look at and consider.

IP
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"Planning to move to a retirement community which comes with "buy-in" of $400K."

My Uncle Bill moved to such a place at age 90. He was still driving but his circle of friends had dropped tremendously, and his house, now about 80 years old, was in a deteriorating neighborhood - seriously.

He got 2 meals a day. Had a one bedroom apartment with small kitchen area in the living room. Maid service once a week to clean the place. Laundry done. Swimming pool and other activities. He liked it. At that point in his life, he was in good shape - but of course, not traveling. Hadn't been in 30-40 years. His wife had died five years earlier.

He survived another 4 years...with the last 3 months in the nursing home part of the community as he went downhill quickly at age 94.

When/if I get to be 90, I'll consider something like that. Maybe at age 80. Who knows? So far I'm in decent shape able to travel, cook, keep the house going, shop, etc.


t.
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IP: after a while one of those corporate chains bought the place and while their contractual terms remained the same, things like fees and limits on increase of fees, the new company started treating them like children and placing endless small new fees on things not covered by the contract.

Wow! Thanks for your input. Scarey. The Carlsbad unit is under the Presbyterian Church. I think that gives some assurance of continuity, but ¿Qui sa? The church has nothing to do with the day to day operations.

CNC
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<< The Carlsbad unit is under the Presbyterian Church.>>

What does that mean? Is it like "AARP endorses UnitedHealthcare's Medicare Advantage plans", or are you signing a contract with the Presbyterian Church?

intercst
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<< The Carlsbad unit is under the Presbyterian Church.>>

What does that mean?

Good question. I have a recent copy of the financial statements. May give some information. I know visiting clergy (The church is across the street) can stay in the resort guest facilities.

CNC
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The Presbyterian and Episcopal churches joined together to found the Westminster Canterbury as a nonprofit where Dad and Mom lived out their last 12 years. Their rectors are Episcopalian. They raised money to buy the land and build the facilities. Beyond that I don't their level of involvement.
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They (the church foundation) also provided financial help for people who fell short on the entrance fees and/or ran out of money to pay monthly fees.
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jgc123 writes,

They (the church foundation) also provided financial help for people who fell short on the entrance fees and/or ran out of money to pay monthly fees.

</snip>


That's good.

But, of course the fear is that at some time in the future they [the church] might sell the operation to a for-profit operator who will nickle and dime the captive population for fees in the fashion inparadise describes.

If it's legally possible to do, eventually some profit-minded medical entrepreneur will make it happen.

intercst
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It is good to be skeptical. On the one hand the Episcopal church is an old church with more money than most so it won't be forced to act due to lack of money anytime soon. On the other hand they are too liberal for the south and have dwindling membership due to the strong conservative evangelical movement among those who are still religious here in the south.

At this point in time the Westminster Canterbury in Irvington VA still has a lot of good people on the board who have raised enough money to provide sufficient 'scholarships' to protect their members.

As always, do your own due diligence.
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jgc: They (the church foundation) also provided financial help for people who fell short on the entrance fees and/or ran out of money to pay monthly fees.

Yes. they mentioned that.

CNC
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But, of course the fear is that at some time in the future they [the church] might sell the operation to a for-profit operator who will nickle and dime the captive population for fees in the fashion inparadise describes.

If it's legally possible to do, eventually some profit-minded medical entrepreneur will make it happen.

intercst


The state of California has strict laws regulating CCRC's, including the finances. Of course if Republicans ever get control, they will repeal all such socialist rules.

CNC
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Very helpful information, IP.

Thank you.

Chili
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Need to stay in the bracket which gives me a 0% tax rate for LT gains.

Oh, and if you are smart, you sell (and immediately re-buy) some of your LT stuff to realize the gains while you can get the 0% rate. Call it Tax Gain Harvesting. Kinda the flip side of Tax Loss Harvesting.

I never thought to use up the rest of the 0% bracket by reseting the cost basis on certain equities. It's brilliant.
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