Conversion of Traditional IRA to ROTH

[packrat44]

What are your thoughts about converting all/majority of a person's Tradional IRA over to a ROTH IRA if you expect to be in a higher tax bracket in future years?

[REWahoo]

Depends on whether you believe future tax rates will change, negating the advantage of converting. Here is a good source of information to help with the decision: Guide to Roth IRA Conversions

[mickeyd]

Under the current IRS tax rates I believe that conversion to a Roth can be quite beneficial to many folks that have other funds available to pay the federal income taxes that will come due because of the conversion. If you believe, as I do, that there is very little chance that rates will be decreased in the future and a great chance that they will be increased in the future, conversion should definitely be considered.

[packrat44]

Originally Posted by mickeyd

Under the current IRS tax rates I believe that conversion to a Roth can be quite beneficial to many folks that have other funds available to pay the federal income taxes that will come due because of the conversion. If you believe, as I do, that there is very little chance that rates will be decreased in the future and a great chance that they will be increased in the future, conversion should definitely be considered.

I am in same camp as you MICKEYD. I feel strongly that taxes will be less favorable in the near future.

It will take another 4 or 5 years to get completely converted without exceeding the present 28% tax bracket.

[Darryl]

I converted all mine back in 1999? 2000? right when my account was at a nice high of course I paid taxes on the high conversion amount and watched the value of the account tumble to about half. If I had waited a year I could have paid half the tax. Fortunes of war?
If you spread out (DCA your conversion you could avoid my scenario).
I certainly expect higher tax rates in the future.

[Nords]

Originally Posted by packrat44

What are your thoughts about converting all/majority of a person's Tradional IRA over to a ROTH IRA if you expect to be in a higher tax bracket in future years?

I think this is an excellent opportunity to search the old threads for keywords "Roth" and "conversion"...

[ERD50]

The 'trick' is to convert only enough to keep from moving you too far into a higher bracket than you think you will be in in the future.

Also consider other deductions/credits that are income triggered. I had to rechar some of my conversion, as it would have reduced the education credits I could take. So, just watch any income levels for other credits/deductions.

I'm in the same camp as most of the others. I think the odds that taxes will be lowered in the future is slim.

-ERD50

[yakers]

Originally Posted by ERD50

The 'trick' is to convert only enough to keep from moving you too far into a higher bracket than you think you will be in in the future.


I'm in the same camp as most of the others. I think the odds that taxes will be lowered in the future is slim.

-ERD50

Like ERD50 said,

The only thing I would add is I think it is a good idea to tax diversify, have taxable, tax deferred and tax free funds so you can make future choices to your advantage.

[ferco]

A couple of questions:

1)What would be the tax implications of leaving your spouse or children with 1 million dollars in a Roth versus a traditional IRA after your death.

2)Which is better, converting a million dollar traditional IRA to a Roth in 2007 and letting grow for 20 years @8% versus a million dollars in a traditional IRA and letter grow @8% taxdeferred for 20 years and then w/d 4% for "x" years.

My real concern is EVERYONE is touting the beauty and perfection of the Roth, but my sixth sense tells me our gov'ment is up to something by encouraging us to convert and pay all this tax money now for its immediate needs. I feel that in all probability they'll change the rules on the tax free withdrawl in the future. Once you've paid the tax upfront (at conversion), its gone, forever !!

[2B]

My plan is to begin converting up to the maximum income for the 15% tax bracket when I retire. I would continue this until its either all converted, run out of non-IRA assets or I begin to draw SS.

After the major conversion phase ends, I plan to tax manage withdrawls from any remaining before tax IRA money and after tax assets.

[Texas Proud]

Originally Posted by ferco

My real concern is EVERYONE is touting the beauty and perfection of the Roth, but my sixth sense tells me our gov'ment is up to something by encouraging us to convert and pay all this tax money now for its immediate needs. I feel that in all probability they'll change the rules on the tax free withdrawl in the future. Once you've paid the tax upfront (at conversion), its gone, forever !!

What The gvmt change it's mind.... NEVER.....

Seriously, I doubt that they would tax the ROTHs as regular income... just not something all the citizens would accept....

Now, I have heard that there is a movement to change the whole tax code and start a 'Fair Tax'... which is not even close to being fair... it would get rid of the current system (yea, right) and change to a VAT tax of IIRC 23%.... then ANY spending will pay the VAT no matter what account it came from...

If this would really happen.. then the traditional IRA is the best to have... but there is so much money sitting there... I am sure there would be a tax on that money anyhow along with the fair tax...

[packrat44]

Originally Posted by ferco

A couple of questions:

Q. 1)What would be the tax implications of leaving your spouse or children with 1 million dollars in a Roth versus a traditional IRA after your death.


A. If you had an estate that exceeded the exclusion limit at time of death, the Roth would be better because it lowers the face value of the transfer. Effectively passing more money to your heirs.


Q. 2)Which is better, converting a million dollar traditional IRA to a Roth in 2007 and letting grow for 20 years @8% versus a million dollars in a traditional IRA and letter grow @8% taxdeferred for 20 years and then w/d 4% for "x" years.


A. I do not know of anyone who would advocate converting $1M in one year. Usually you would cap your conversion at the highest tax bracket you expect to be in when withdrawals are made.

I do not want to be forced into a manditory withdrawal at 70 1/2 which is a time when a major investment will likely be liquidated. (I will have no control over the sale.) This liquidation would result in being in the highest tax bracket.

It is my intent to let the ROTH IRAs ride untouched to be used only in an emergency, then passed to heirs at time of death.

Q. My real concern is EVERYONE is touting the beauty and perfection of the Roth, but my sixth sense tells me our gov'ment is up to something by encouraging us to convert and pay all this tax money now for its immediate needs. I feel that in all probability they'll change the rules on the tax free withdrawl in the future. Once you've paid the tax upfront (at conversion), its gone, forever !!

A. The government could change the tax rules. Look at SS, it use to be untaxed. Under two Democratic presidents it became taxed first at a maximum of 50%, then raised by Clinton to a max of 85%.

I have a larger concern that taxes will be much higher in the very near future and I am willing to prepay my taxes at a lower rate. Kind of like the idea "buy low, sell high".



Sorry for the screw up on the formating. It will take this old dog a while to learn.

[ferco]

Since we all know there's a reason for everything our gov'ment does, (be it underhand or above hand) was the rationale for creating the Roth simply to get tax dollars up front? If that was the case, then why set a limit on the annual contribution as well as the income constraints (which are due to change soon). I'm not an economist but I believe there's always concerns with the flow of money and the money supply etc, ie., too much or too little money in savings or circulation has some negative effects.

So should all the young folks (just starting work) not even bother with Traditional IRA's and just put their retirement funds in Roth's?

On the conversions from the traditionals to the Roth are you paying a penalty as well as the tax for the early withdrawl prior to age 59 1/2?

[mickeyd]

my sixth sense tells me our gov'ment is up to something by encouraging us to convert and pay all this tax money now

I think that you sixth sense is a bit off ferco.

The feds know that there are many future tax dollars out there that are sitting in tax deferred plans that will require RMD sooner or later and they will get a big federal tax payday soon enough.

[packrat44]

So should all the young folks (just starting work) not even bother with Traditional IRA's and just put their retirement funds in Roth's?


My son and daughter are putting the maximum in their ROTH accounts (along with their TSP and 403(b)). Nothing goes to a traditional IRA.

I would usually recommend anyone young to also put into a ROTH rather than a traditional IRA. When someone is just starting work they are usually in a low tax bracket. If they invest properly and live below their means, they will be in a higher tax bracket at time of withdrawal. This favors the ROTH.

A person can effectively place more in a IRA if they put in a ROTH since the contribution limit is set at a face value, not the after tax value.

I agree with you in that we do not know for sure what the government will do in regarding taxation. The same goes with not being able to accurately forecast the market. We have to make the best choice after weighing what information we have.

[REWahoo]

Originally Posted by packrat44

...we do not know for sure what the government will do in regarding taxation. The same goes with not being able to accurately forecast the market. We have to make the best choice after weighing what information we have.

Since we don't know what the future holds for the market, it makes sense to diversify our investments. That same reasoning holds true for the future of taxation and it makes sense to diversify retirement tax instruments as well. For that reason I have (or had) a combination of 401k's, TIRA's, Roth IRA's, after tax savings, etc.

[packrat44]

Originally Posted by REWahoo

Since we don't know what the future holds for the market, it makes sense to diversify our investments. That same reasoning holds true for the future of taxation and it makes sense to diversify retirement tax instruments as well. For that reason I have (or had) a combination of 401k's, TIRA's, Roth IRA's, after tax savings, etc.

Thanks REWahoo,

Your response is what I was looking for. I want to know if their are any downside to converting all TSP, 403(b), traditional IRA to ROTH IRA. You have a good point with tax diversification.

Anyone else have ideas on this subject?

[Nords]

Originally Posted by packrat44

Anyone else have ideas on this subject?

Nothing that hasn't already been beaten to death extensively analyzed on other threads containing the keywords "Roth" and "conversion"...

[LOL!]

Originally Posted by packrat44

So should all the young folks (just starting work) not even bother with Traditional IRA's and just put their retirement funds in Roth's?

My son and daughter are putting the maximum in their ROTH accounts (along with their TSP and 403(b)). Nothing goes to a traditional IRA.

If one is working and is eligible for the 401k or 403b at work, then one cannot really use a traditional IRA unless one's income is low. If that's the case, then the Roth is a better deal anyways since anyone with low income is in a low marginal income tax bracket.

Conversely, if one makes alot of money, then they are not eligible for Roth anyways.

Switching topics slightly: early retirees are in a great position to convert traditional IRA money to a Roth in those years before they begin to get SS benefits. They are almost certain to be in a lower tax bracket than they were during their working years: after all, their expenses can be covered by return of capital (not taxed), qualified dividends (taxed at most at 15%), and long-term cap gains (taxed more favorably than ordinary income).

For ourselves, the conversion issue is pretty easy to figure out. We have always participated in our employers' 401k and 403b plans. We are not eligible for Roth IRAs. Thus our measly traditional IRA assets are leftover from when we put money in IRAs when we worked part time in grad school. So conversion will occur during those years when our tax bracket goes from 33% to about 10% or less. We will also rollover 401k money and convert that to up to a tax bracket limit. It looks like we will have 15 years before drawing SS, so long term the tax savings work at the front end and at the back end. Can we have our cake and eat it, too?