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head of household/Roth conversion
Old 07-31-2004, 06:07 PM   #1
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head of household/Roth conversion

DUH?

Since I'm filing head of household now a days with an 87 year old mom AND recyling dryer sheets/outdoing myself in aggressive frugality this year - my take is that I can convert some IRA to Roth toward the end of this year and stay in the 15% bracket - provided - all in - income wise - I'm under 38k and change. So cap gains plus pension plus divs plus $ of IRA conv = 38K
or less, I'm in the 15% bracket. State taxes are a bit of a butt biter - 6%.

Put it in Dodge and Cox or Wellington - or even Vanguard Target Retirement, cook twenty years and get a hot rod wheel chair in the rest home.

Hmmmmm - or keep it simple - let it work where it's at - take money when I need it and suffer the fickle finger of fate come RMD - about 600k, 60/40 balanced index, 9 1/2 years to 70 1/2.

I go back and forth - and end up letting it sit - so far. Hard truth - mom at 87 won't last forever so am I looking at a window in which to act? And no I ain't gettin' married to beat the IRS.
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Re: head of household/Roth conversion
Old 07-31-2004, 07:03 PM   #2
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Re: head of household/Roth conversion

unclemick, I keep running the ROTH conversion
calculators as well. From a strictly financial viewpoint,
if you assume 15% bracket at conversion and 15%
at withdrawal, it is a break even deal. However,
the ROTH has all the perks of no RMD and candy
for your heirs. Sloth and complacency have hindered
me thus far, but I am seriously considering conversion
of my wife's IRA.

Cheers,

Charlie
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Convert while you have the window of opportunity.
Old 07-31-2004, 10:40 PM   #3
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Convert while you have the window of opportunity.

Unclemick,

It's possible that tax rates are as low as we're going to see for some time. If I had to place a bet, I'd bet that tax rates will be higher at RMD than they are today. If your investments are a roaring success, then your RMD will definitely spike you into tax payback territory. The fact that you can exploit a lower tax bracket is an unexpected bonus. Seize the opportunity!

My FIL is driving himself crazy over RMDs. He has 401(k) money that's a mix of before-tax contributions, employer matches, after-tax contributions, and employer lump-sum payments. He and his wife have IRAs with deductible contributions and non-deductible contributions. They're trying to do their first RMD in a manner that doesn't sell the wrong assets at the wrong time, and they also have to keep an eye on estimated tax payments. I can only imagine how much worse it would be if they didn't have a son who's a CPA with over two decades of high-roller tax experience. The RMD rules are so complicated (and mistakes are so heavily penalized) that it's easier to spend the time (and money) now converting to a Roth than it is to do the RMD shuffle later with an expensive rental CPA.

One other conversion benefit that hasn't been brought up yet is the boost you get by paying conversion taxes outside of the Roth. It's not just the tax brackets at conversion vs the tax bracket at withdrawal, it's also the amount of money compounding away in the Roth vs conventional IRA in the meantime. If your $100K conversion costs $15K in taxes and you pay that without using any of the IRA funds, then the Roth starts its tax-free RMD-free compounding at $100K instead of $85K. The effect is a one-time booster contribution outside of the usual limits.

That factoid was pointed out to me by Bruce Steiner, one of the CPAs who regularly posts at Ed Slott's IRA board. http://www.irahelp.com/cgi-bin/forum/index.cgi/ Over half the board's posters are CPAs struggling through RMD calculations & IRA inheritance tax forms, but they delight in answering our most obscure questions.

Spouse and I are starting the conversion next month to stay in the 15% bracket. We'll pay the taxes by liquidating taxable investments and we'll do a little every year until it's done. Even if it's only $10-15K it's that much more tax-free compounding before some politician decides we have to change the rules to save us from ourselves...
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Re: head of household/Roth conversion
Old 08-01-2004, 05:13 AM   #4
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Re: head of household/Roth conversion

Nords

Yep - Have some 'side money' to pay the taxes and 'mail in' estimated tax forms already from the IRS - so I'm leaning that way.

?? Do it in several steps - just in case I need to undo the conv(can't imagine why) or one lump toward the end of the year. I'm thinking stand alone(instead of top down overall port. analysis) - i.e. internally self balancing out of the can - from consv. Wellesley, Wellington, Dodge and Cox Balanced, Target retirment 2015, et al rather a swinger like TSM, Index 500, or even total international. Do some conv each year for the next nine years - to the extent possible?

Stuck in analysis paralysis.
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Re: head of household/Roth conversion
Old 08-01-2004, 06:29 AM   #5
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Re: head of household/Roth conversion

Chuck-Lynn:

Darn it, Charley, just when I thought it was safe to get in the water, you guys brought up conversion of regular ira's to Roth. You are about the closest to my situation on the board.
I read Nords take, and for him, it is hard to make a case against conversion. He and wife both have cola'd pensions, and will qualify for soc. sec. later on, and from his post, and prev. posts, it also appears at on point will receive a windfall. We should all have that problem, but taxes will play a big role in his life.
Here is my take on conversion. My wife & I have never received an inheritence, nor ever will. (No windfall to push us into a different bracket.).
Our income until we reach RMD, is soc. sec. and roll-over CD's. Obviously in low bracket now.
I could convert at $100,000 of my Ira, and pay $15,000 to Uncle.
A couple of years ago, they changed RMD to approx. 26 years from prev. 16.
If we have a bad market for the next 10 years, taxes will be the least of our worries. (And the $15,000 for the conversion is gone forever).
Just thinking outloud, Charley. Let me know where my thinking is fuzzy.
Regards, Jarhead

























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Re: head of household/Roth conversion
Old 08-01-2004, 06:35 AM   #6
 
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Re: head of household/Roth conversion

I'm with Jarhead on this. I view taxes as a nice problem to have in the future. Paying them up front is something that I try to avoid. I have always lived by the 'Defer them as long as you can'.

If investments do wonderful down the road and I get pushed into a higher tax bracket, I'll just be in that much better position to pay them.
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Re: head of household/Roth conversion
Old 08-01-2004, 08:32 AM   #7
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Re: head of household/Roth conversion

As Nords said, it's a good bet that your tax rate today will be lower than it is tomorrow. This has nothing to do with your bracket changing. It's a fact that our government is currently spending *way* more than they're taking in via taxes. I think the probability is close to 100% that some future administration will have to reverse this trend, and chances are it'll be when you're taking IRA distributions.
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Re: head of household/Roth conversion
Old 08-01-2004, 08:50 AM   #8
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Re: head of household/Roth conversion

Cutthroat:

What always bothered me about roth conversions, is if it is "generally" advantages for the highest percentage of folks to convert, why would the gov"t allow it?

Las Vegas doesn't allow you to double down on a black-jack table because its a good deal for most people.

Cynical view, but, I have always found the IRS to be in the business of collecting as much as they can.

As I stated before, in some circumstances, in my opinon, it might make sense. (Nords situation is possibly one).

If the market is a bad one for 10 years or longer, I would (as I stated before),find myself with taxes being the least of my worries.
If we have a good market that is kind to us (as you stated), be happy to pay my fair share of taxes.
But, I will have to admit, that like Charley, I have thought about this a lot, but I always (like you) can't force myself to pay taxes in advance, betting on the come.
Jarhead

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Re: head of household/Roth conversion
Old 08-01-2004, 09:54 AM   #9
 
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Re: head of household/Roth conversion

Jarhead

I think I read a long while ago (Andrew Tobias - I think) that it is safe bet to 'always delay taxes' - because laws can be changed where you may never have to pay them at all.

The Government will have to get the money for these huge debts we are running up, but to get it from the Old Baby Boomers will be Political Suicide. Old Folks Vote and Politicans messing with Social Security, Medicare, Or Retirement Accounts will see their Careers end swiftly.

There will be Politicans that will promise good things for these accounts, because there are a lot of Votes.

Where will we get the Money? - The same place we got the money for the Iraq War and Tax Cuts. We'll borrow it!
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Re: head of household/Roth conversion
Old 08-01-2004, 09:55 AM   #10
 
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Re: head of household/Roth conversion

There seems to be an implicit assumption in discussions about Roth IRAs that, in twenty years or so, Roth IRAs will have essentially the same form they have now, e.g., between now and then there will be no "Roth IRA Preservation Act." :P

I remember in the very early 1980's, regular IRAs were basically opened to everyone, and I started contrbuting to IRAS. Later, in the Reagan administration, the rules were changed and IRAs became much less attractive to me (because of the need to maintain detailed records for decades). I see no reason why something similar can't happen to Roths, as a matter of fact, I'm assuming that it's almost certain that Roth IRAs will be tinkered with. (I remember begining assured by someone that the was so much poltical special interest behind regular IRAs that they would never be messed with).

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Re: head of household/Roth conversion
Old 08-01-2004, 10:22 AM   #11
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Re: head of household/Roth conversion

When in doubt, apply the wisdom of Solomon: convert 1/2 to a Roth, and leave the other 1/2 alone.
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Re: head of household/Roth conversion
Old 08-01-2004, 04:37 PM   #12
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Re: head of household/Roth conversion

Wab

Yep - do some, keep some - wonder what Solomon would have said about trusting Congress for a decade or so. I seem to remember Mark Twain was less than kind in his quotes.
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Re: head of household/Roth conversion
Old 08-01-2004, 08:20 PM   #13
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Re: head of household/Roth conversion

Hey jarhead et. al.,

My fuzzy thinking goes like this: My wife is 63, thus
7 years from RMD on her IRA. Converting her IRA
would take at least 4-5 years for us to stay in the
15% bracket. In the meantime, I am already 70
and we are drawing my IRA down at about 6% per
year for living expenses. At that rate it would be
lucky for it to last 16-18 years. I think it highly unlikely
that RMD on my IRA would cause us to exceed the
15% bracket. After we convert her IRA we could start on mine and play it by ear depending on the tax situation.

Basically, I have a lot shorter term outlook than most
of you guys. Politically, I don't think the Government
will be able to raise the lower brackets in the next
4 years, maybe 8, no matter who wins the election.
I also don't think it is likely that the Gov will tinker
with the ROTH law.

I guess the bottom line is that one could start the
conversion process, do it little by little to stay
in a low bracket and stop when /if it makes sense.
Money already converted would be safe and free of
taxes for you and your heirs.

Cheers,

Charlie
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Re: head of household/Roth conversion
Old 08-03-2004, 09:43 AM   #14
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Re: head of household/Roth conversion

Chuck you dog, you landed a younger woman!

My wife is a cradle robber. I'm three days younger than she is. Dont think she doesnt hear about THAT on a regular basis.
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