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Old 04-03-2010, 02:44 PM   #21
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I don't see how this reduces the benefit of a Roth in any way.
As I see it, it makes a difference. When an individual makes a contribution to a Roth, he pays the tax on that income up front. If he makes a contribution to a deductible TIRA, he pays no tax on the income used to make the contribution when the money is invested, but must pay tax on the back end. The more that the later tax burden gets shifted from income taxes to consumption taxes, the more the individual with the TIRA benefits, and the more the person who paid taxes up front gets a worse deal relatively speaking (since now he'll pay tax again when he spends the money rather than having truly tax-free use of the funds).
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Old 04-03-2010, 02:49 PM   #22
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I am wondering. I keep hearing a lot of folks say that with the mounting deficits, the only way to raise enough revenue is for the federal gov to replace the current income tax with a VAT. It seems to me that such a change would essentially screw over folks who have already paid the tax to fund the Roth.

Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
Hmmm, ask me again in mid-November. By that time, I should have enough info to make a comment.
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Old 04-03-2010, 03:15 PM   #23
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If the VAT is added to but does not replace income taxes, then we may miss out avoiding increasing income taxes we might expect now. But if income taxes remain equivalent to what's in place now, then Roth will do its job OK.

If VAT replaces income taxes, then I would expect (hope?) there would be a form to fill out where you indicate Roth funds withdrawn, and stuff bought, in order to receive at least a partial rebate of VAT you paid. This would be similar to what you can do in England and Canada, as a US citizen, to receive a refund of VAT on stuff you bought. Common enough now, so it shouldn't be too hard to implement for Roth funds.

I'm not terribly afraid of using the Roth, but I do have somewhat of a balance between taxable, traditional IRA/401k, and Roth accounts. Can't do much more than that right now.
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Old 04-03-2010, 05:53 PM   #24
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Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained
the same.

My tired old brain just does not understand how paying tax twice on the same money is not a bad thing.

Thanks and Cheers,

charlie
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Old 04-03-2010, 08:28 PM   #25
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Quote:
Originally Posted by charlie View Post
Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained
the same.

My tired old brain just does not understand how paying tax twice on the same money is not a bad thing.

Thanks and Cheers,

charlie
You would pay more - the VAT. But if FIT remains the same or higher you would both that and the VAT on the 401K. The ROTH would still be advantaged - relatively.
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Old 04-03-2010, 08:45 PM   #26
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Does anyone know of any sizable nation that has switched from income tax to VAT?

I just don't see it happening. Addition of VAT or other sales tax quite possible, elimination of FIT, highly unlikely, imo.
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Old 04-03-2010, 09:17 PM   #27
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Quote:
Originally Posted by charlie View Post
Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained
the same.

My tired old brain just does not understand how paying tax twice on the same money is not a bad thing.

Thanks and Cheers,

charlie

I'll give it a shot.

If I am in the 20% tax bracket and take out $1000 of my 401K, I will end up with $800, then if the VAT is 10% I have basically $720 worth of purchasing power. I can buy the $720 ipad b/c with VAT it will cost $800.

If I take it out of my Roth, I get the full $1000 out b/c I already paid taxes on it when I put it in, then I pay the 10% VAT on what ever purchase.

All things being equal, I hopefully paid lower taxes on the Roth when I put it in and it has grown exponentially over time, wishful thinking.
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Old 04-03-2010, 09:31 PM   #28
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(Bold added)
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Originally Posted by charlie View Post
Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained the same.
I think the bold part is the issue. If we're adding a VAT, then I'm assuming it's because the government "needs' more money. So, the choices would be FIT+VAT or a larger FIT. If the FIT grows, then the Roth has a greater advantage. If the FIT stays the same, then there's no difference between the two options. If the government decides to reduce the FIT rates and make things up with higher VAT rates, then the Roth loses out (because you would have been better off not paying the higher tax rates when you put the money in). To the degree that a VAT allows a smaller (than it would otherwise have been) FIT, a Roth becomes less attractive than it would otherwise have been.
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Old 04-03-2010, 09:38 PM   #29
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Switching from FIT to VAT would seem to put too many accountants out of business. The lobbing effort would be intense!
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Old 04-03-2010, 09:56 PM   #30
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Switching from FIT to VAT would seem to put too many accountants out of business. The lobbing effort would be intense!
The number of accountants in companies to keep track of and manage VAT will increase plus what about all the deductions? Will the guvmnt really wipe out all the tax breaks for mortgage interest, charitable giving, home office workers etc? I'm pretty sure that what ever changes happen, it will not decrease employment in the finance industry.
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Old 04-03-2010, 10:47 PM   #31
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Originally Posted by swampwiz View Post
I am wondering. I keep hearing a lot of folks say that with the mounting deficits, the only way to raise enough revenue is for the federal gov to replace the current income tax with a VAT. It seems to me that such a change would essentially screw over folks who have already paid the tax to fund the Roth.

Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
I think a VAT is likely one day (in addition to keeping the income tax). I wouldn't say it is any worse for Roth IRAs than it is for Traditional IRAs and 401ks. They will all get hit with the new tax indirectly.

The only good thing about a VAT tax is that I don't buy a lot of stuff. So I think it would affect me a lot less than the average. I could also see myself expating one day, in which case I would get to avoid the VAT tax.
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Old 04-04-2010, 10:29 AM   #32
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A VAT is such a heavy political lift as to be nearly impossible. Unless you have massive income tax reform (read elimination) one entire political party will be against it. And at least half of the other party will be against what is an extremely regressive tax (flip these percentages depending on which party holds the White House). You can easily see a 75% political majority forming against a VAT. Not to mention that the process of introducing an entirely new tax regime, with all of the attending complexities, will make the health care debate look like a co-ed pillow fight.

Not going to happen.
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Old 04-04-2010, 10:38 AM   #33
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More likely there will be a VAT and Income tax!
This is the most likely scenario. Look at Europe - they have both - income taxes and VAT.
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Old 04-04-2010, 11:03 AM   #34
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Originally Posted by Nords View Post
Tough choice:
- Doing nothing and getting hammered by traditional IRA RMDs at age 70.5,
or
- Taking advantage of the conversion opportunity while there's still an opportunity.

I've rarely seen anyone craft a successful investment plan around potential tax legislation...
I'm looking at this possibility - I haven't run the numbers yet - but I think it can be tax efficient.
Start IRA distribution at 59.5 - smaller distribution amounts - low current income from other sources of income - low current income tax rates
Start SS at 62.5
Taxable accounts - manage for growth; and manage income as needed


So for a single person - Standard + Personal Deduction 9,350 + 34,000 max 15% tax rate (currently) = $43,350 of income to stay in the 15% bracket

At 63
$43,350
-10,000 - (SS - 50% taxable amount of 20,000 - may not apply)
-IRA Distribution
-Taxable Investment Income
- Pension
= 43,350
The above is how I would model it. I haven't researched the IRA distribution rules (e.g. Can the distribution amount vary by year?). But taking IRA distributions earlier rather than later might be advantageous.

The first step should always be what income you need (or SWR you want) then go back and see if how you can manage the tax efficiency.
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Old 04-04-2010, 11:28 AM   #35
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As I see it, it makes a difference. When an individual makes a contribution to a Roth, he pays the tax on that income up front. If he makes a contribution to a deductible TIRA, he pays no tax on the income used to make the contribution when the money is invested, but must pay tax on the back end. The more that the later tax burden gets shifted from income taxes to consumption taxes, the more the individual with the TIRA benefits, and the more the person who paid taxes up front gets a worse deal relatively speaking (since now he'll pay tax again when he spends the money rather than having truly tax-free use of the funds).
Quote:
Originally Posted by charlie View Post
Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained
the same.
My tired old brain just does not understand how paying tax twice on the same money is not a bad thing.
Here's a niche.

We're in our late 40s and not withdrawing from our IRAs. Instead we're enjoying my pension income, a little rental income, more dividend income, and some of those rockin' long-term cap gains (offset by cap losses or by the cap gains zero-percent tax bracket). We're in the 15% tax bracket for now. We know when spouse hits age 60 and her pension begins that we'll be in the 25% tax bracket-- at least for as long as she's alive or until that bracket's tax rate rises. (I don't see it getting any lower.) When we have to start taking RMDs from conventional IRAs then we're going to pay taxes at the 25% rate before we even figure out what to do with the RMD addition to our checking account.

During our working years we were frequently above the income level that would allow Roth contributions, and we've almost never had a deductible contribution to a conventional IRA. So now that we're in the lowest tax bracket we're ever likely to see, we might as well convert the conventional IRAs to Roths.

If we convert then when we hit our 70s (and would have had to take RMDs from conventional IRAs) we won't have to touch our Roth IRAs. We could have donated our conventional IRAs to charity instead of taking an RMD, but with the Roths we have a choice-- leave it alone, take some out, or make a charitable donation.

Depending on the means testing for Social Security, not having to take an RMD might tax less of our SS. But admittedly this is a niche even in the niche. I think spouse's pension will drive our SS into max taxation.

As I understand a VAT, it's only taxed when you spend it. If we don't spend it then we won't pay tax on it. If we pay FIT on a conversion at 15% then we pay the lowest FIT that we're ever likely to see, and I don't think FIT will be swept away by a groundswell of VAT sentiment. We'll take our chances with VAT.

Again this might not make sense for 90% of ERs. But for those dual-working couples with two pensions and taxable portfolios in addition to IRAs, the VAT doesn't change the logic behind a Roth conversion.
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VAT will be additional, income tax will not be reduced
Old 04-04-2010, 12:39 PM   #36
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VAT will be additional, income tax will not be reduced

I think income tax rate will not go down much even with VAT. Total consumer spending is around half of GDP, ~7.5T$s, remove food, prescription, these kind of goods/services, VAT may be levied on 6T$ worth of GS. At 10% rate it's 600 billion, I guess this is the amount good for reducing deficit if one time items (to deal with financial crisis / wars) are removed. There are not many items in the budget which can be cut, most are entitlements/essential and can not be cut.

Income tax rate are not going down even with VAT, deal can be sweeten initially with some rebates for low to moderate income and those will disappear with time and inflation. Most politicians dare not vote to reduce tax for rich while adding VAT for poor. I think ERs will be able to reduce impact of VAT with intelligent buying, most food items are exempt generally, prepared food is not, buy second hand items as many already do.

So it really does not matter if one converts to ROTH or not, at least from VAT perspective.

Discloser: Currently I live in a country with 10-12.5% VAT on goods and services and this sometime reduce motivation for buying, most food, health, essential things are exempt.
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Old 04-04-2010, 01:21 PM   #37
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Our gummint will soon be so desperate for money that it will probably do all the things we've mentioned (and a few others we haven't even thought of yet) to come up with money. (Inflate the currency, add a VAT or sales tax or both, first lower the FIT to suck us all in - then raise it back later, then raise the VAT/NST - (it's only another penney!) etc., etc.) Of course, it will only work if we are all convinced that someone else will be paying the lions share. That's the real trick. Convince everyone that THEY are getting a good deal. The AMT was a great deal for the "poor" because now the "rich" would have to pay their "fair" share. Now, guess what, we're all "rich". And on it goes. Class warfare and envy is the politicians best friend.

We always blame this situation on the "politicians", but that's sort of like blaming the tiger who bites your arm off when you stick your hand into its cage. We elect 'em, we keep 'em there, we demand services, we demand that everyone has everything (food, "affordable" housing, "free" healthcare, "cheap" oil, etc. etc,) and then wonder why taxes (stealth or not) creep up. I don't see this all ending well. Especially for anyone of "modest" but available means. There are no longer enough "rich" people to tax, so I think "we're it" this time (again!).

Really don't mean this to be a political rant. Just a rant.
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Old 04-05-2010, 12:08 AM   #38
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Our gummint will soon be so desperate for money that it will probably do all the things we've mentioned (and a few others we haven't even thought of yet) to come up with money. (Inflate the currency, add a VAT or sales tax or both, first lower the FIT to suck us all in - then raise it back later, then raise the VAT/NST - (it's only another penney!) etc., etc.) Of course, it will only work if we are all convinced that someone else will be paying the lions share. That's the real trick. Convince everyone that THEY are getting a good deal. The AMT was a great deal for the "poor" because now the "rich" would have to pay their "fair" share. Now, guess what, we're all "rich".
Whoa, waitaminnit, didn't the state recently cancel a bunch of school days because there's not enough money to teach our children well?

And then didn't Oahu just raise the excise tax from 4% to 4.5% to "give" us all a rail transit system? And then didn't the Hawaii legislature raise the income tax upper brackets to soak the rich?

Wow, it's like we're all psychotic or something...
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Old 04-05-2010, 02:59 AM   #39
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Whoa, waitaminnit, didn't the state recently cancel a bunch of school days because there's not enough money to teach our children well?

And then didn't Oahu just raise the excise tax from 4% to 4.5% to "give" us all a rail transit system? And then didn't the Hawaii legislature raise the income tax upper brackets to soak the rich?

Wow, it's like we're all psychotic or something...
Well, I guess you're right. We must be 'psychotic' to let it happen.
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Old 04-05-2010, 09:21 AM   #40
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In the mid 80's Canada instituted an national VAT (called GST). It was fairly low (around 5% I think). In order to obscure the effect of this they also cut personal income tax rates at the same time. As I recall the max marginal rate went down by around 3%. Although VAT's are very regressive they are favored by economists because they encourage saving (if you don't spend money there is no VAT to pay). This may appeal to some of the LBYM's on this board?
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