Rollover to a Roth?

[JoeWras]

see the flow chart on p. 63 http://www.irs.gov/pub/irs-pdf/p590.pdf

Once you turn 59.5 y.o., the only clock that matters is the 5 yr clock of the oldest Roth. If you have a pre-existing older Roth (>= 5 yr old), the conversion clocks don't matter unless, of course, they are the oldest Roth.

Nice. Good pointer to the chart. That cuts through a lot of the confusion.

 

[FinanceDude]

What you fail to consider is purchasing power of your dollars today vs. purchasing power of those dollars at some future date after the inflation effect. After all, it not about the number of digits in the bank but what can actually be consumed with those dollars when you go to spend it.

You left out a time preference, so lets assume 10 years. If we just consider today's conservative estimate of 9% real inflation and not a hyper-inflation scenario, the actual lost buying power of the $17,250 tax bill in the future is equivalent to $7,287 today, since you will be paying the tax bill with dollars that are worth less in the future.

This situation only gets worse for Roth as you extend the time preference and increase the real inflation rate, which is already baked in the cake.

I doubt most on here will agree with your hyperinflation ideas. Also, in the future, if you are going to post comments like "Today's conservative estimate of 9% real inflation", without links, noone is going to take you seriously........

 

[devans0]

I checked your pointer. The flowchart is excellent. The part that has me concerned is in the points on the end of that same page 63. If IRC, my internet source talked of the additional 10% penalty rules especially concerning a 401K conversion and a Roth 401K conversion not being the same as an IRA conversion.

From your link:
"The 5-year period for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion or rollover contribution, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution."

The link that you provided then gives an example that is clear as mud that indicates that year basis is not the same. I am not a tax expert, but where the flow chart giveth, the fine print seems to taketh away. The ramifications of a mishandling is too costly for me to blithely assume that I have covered bases needed for that IRS audit. Been there, did that once and won, but really don't wish to repeat the hassle...ever. This is one that I want to check with a much better tax expert than I am

 

[Alan]

This is one that I want to check with a better expert. The ramifications of a mishandling is too costly for me to blithely assume that I have covered all the documentation needed for that IRS audit. Been there, did that and won, but really don't wish to repeat the hassle.

Something that all members should remember is that this is an anonymous board and all this free advice should be double-checked as there is no recall should the information provided be wrong.

 

[noone]

.. noone is going to take you seriously........

There you go again putting words in my mouth. Whether or not I take anyone seriously is noone's business.

 

[kaneohe]

I checked your pointer. The flowchart is excellent. The part that has me concerned is in the points on the end of that same page 63. If IRC, my internet source talked of the additional 10% penalty rules especially concerning a 401K conversion and a Roth 401K conversion not being the same as an IRA conversion.

From your link:
"The 5-year period for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion or rollover contribution, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution."

The link that you provided then gives an example that is clear as mud that indicates that year basis is not the same. I am not a tax expert, but where the flow chart giveth, the fine print seems to taketh away. The ramifications of a mishandling is too costly for me to blithely assume that I have covered bases needed for that IRS audit. Been there, did that once and won, but really don't wish to repeat the hassle...ever. This is one that I want to check with a much better tax expert than I am

As Alan pointed out, this is the internet and anything goes so you should definitely be careful. This is an interesting general problem......how does a (relative) layman evaluate an expert's competence in a technical field? Does paying for an answer make it better? Does paying more make it even better/more likely to be true. What if you get 2 differing answers? I don't know the solution but I can appreciate the problem.

Not the whole answer but a piece......I would at least learn something so that if the advisor says something that I recognize as wrong, I can probe deeper.

Also recognize that esp. on the internet, this can be a shared responsibility between questioner and answerer..... the answerer will attempt to work on the apparent question. If the questioner leaves other relevant info, the questioner may not realize it. E.g. AFAIK, your reference to 401K/Roth 401K was not in your original post?

A suggestion (and it's free for good or bad)......ask your question w/ all the gory detail whether you think it's relevant or not at the fairmark.com forum (retirement sub-forum). Look for a reply by Alan S. I would bet a fair amount on his answer.......but in all honesty, it's the same dilemna I mentioned in the beginning. How do I (the layman) know he really knows his stuff?

Another tidbit......the section you mentioned has this in the beginning:

Additional Tax on Early Distributions
If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

To me, that says that the 10% additional tax may apply to a non-qualified distribution. To me, that also implies that if the distribution is qualified,
the 10% additional tax does not apply..............however, it does not actually state the latter so if you are a worrier, there is cause.

I agree w/ you that the passage is clear as mud.....I believe it is pointing out the the 5 yr master clock from when the first Roth was opened is not necessarily the same as the 5 yr clock for each conversion that applies when you are < 59.5 and taking distributions.

Good luck!

btw....how did you quote that section from pub 590. When I try to copy and past from there, my computer highlights both columns and the lines get intermingled.

 

[kaneohe]

The following table is from KAWill (checked by Alan S.) at the fairmark.com forum.
KAWill found reading IRS pubs confusing and wanted to have a simple table.
It lacks some important punctuation....so imagine a semicolon after every yes/no.
The table lists whether distributions from a Roth are taxable or subject to the 10% penalty. Not explicitly stated but assumed is the ordering principle: contributions come out first, then conversions (oldest thru youngest in that order), and then earnings. Tis a blessing to me, if not all mankind! Consider using it to test your advisor before hiring him.


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

 

[ronocnikral]

if it matters, I agree with kaneohe's reading on this issue. Pub 590 makes it clear that there are 2 different kind of distributions. Qualified and non-qualified. If your distribution is not qualified, it is obviously non-qualified and gets kicked over to a separate part of the rules. Part of these rules are the roth ordering rules for non-qualified distributions. Another part is the 5 year rule for each conversion/rollover. I read it the same as kaneohe and Alan S. He has answered this question many times, so doing a google search will benefit you. Fairmark Forum :: Retirement Savings and Benefits :: 5 year Roth rule and 59 1/2 early withdrawal

Furthermore, and adding more confusion, I believe IRS publications are non-binding. So, if something is clear to me, you and the rest of the world as read from an IRS publication, they aren't held to what is written in the publiCAtion. it is their interpretation of the legislation that matters. or at least a judge's if you choose to take it that far. With that said, I think the IRS makes a fair and honest attempt to describe the regulations which they impose.

my cent and a half.

 

[StuartR]

I doubt most on here will agree with your hyperinflation ideas. Also, in the future, if you are going to post comments like "Today's conservative estimate of 9% real inflation", without links, noone is going to take you seriously........

Here ya go FinanceDude:

John Williams' ShadowStats.com

The CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.

In short, the current CPI is a wholly manipulated government number, removing from the current basket of measurements anything that doesn't reflect the required narrative so as to keep masses with wealth to protect happy with a 3-4% returns.

 

[MichaelB]

Here ya go FinanceDude:

John Williams' ShadowStats.com

In short, the current CPI is a wholly manipulated government number, removing from the current basket of measurements anything that doesn't reflect the required narrative so as to keep masses with wealth to protect happy with a 3-4% returns.

Good old shadow stats. So, if the "real" annual CPI is 2%-3% higher than the published cpi and has been that way for the past decade, the "real" GDP is about 25% bigger than the one we all are living. Don't ya' think someone would have noticed by now?

 

[REWahoo]

Good old shadow stats. So, if the "real" annual CPI is 2%-3% higher than the published cpi and has been that way for the past decade, the "real" GDP is about 25% bigger than the one we all are living. Don't ya' think someone would have noticed by now?

Pity party pooper...

 

[StuartR]

Good old shadow stats. So, if the "real" annual CPI is 2%-3% higher than the published cpi and has been that way for the past decade, the "real" GDP is about 25% bigger than the one we all are living. Don't ya' think someone would have noticed by now?

Here is an excellent essay by Michael Rozeff which shows exactly why using the CPI in any form is problematic:

Inflation Is Worse Than You Thought

Most analysts use the CPI or some variant for measuring price inflation. I prefer to use the growth rate in the monetary base, also known as M0. By this measure, price inflation is much worse than you thought if you use some version of the CPI.

I use the growth rate of the monetary base for three main reasons. First, it is a very accurate measure of the inflation in bank notes of the Federal Reserve (FED). Second, the FED's bank note inflation is a major cause of changes in prices in the economy. Third, the CPI has major flaws and difficulties.

What has been real growth in Gross Domestic Product (GDP) if we use the monetary base as a deflator?

In 1947, the GDP began the year at $237.2 billion. In 2009's first quarter, it is $14,178 billion. This is a 6.6 percent growth rate unadjusted for inflation in any way.

Over the same period, the monetary base rose by 5.38 percent a year if we stop last September(2009) and 6.31 percent if we include the recent period of high growth. Using the September figure, the GDP has grown 1.2 percent a year after taking into account the monetary inflation represented by the growth in the FED's bank notes outstanding. If the CPI is used, the picture is much more rosy. The CPI went up 3.66 percent a year, so that real GDP growth comes out 2.94 percent a year.

Are Americans better off than they were in 1947 by an amount that is measured by 2.94 percent a year improvement? No one knows how to measure such a thing. I sure don't. However, it means that Americans are 6 times better off, because $1 becomes $6 if it compounds for 62 years at a rate of 2.94 percent a year. If real income actually grew at the 1.2 percent figure that the monetary base method suggests, then the improvement is by a factor of 2.1. Americans are about twice as well off by this measure. My guess is that inflation has been worse than the CPI index might lead one to believe.

 

[MichaelB]

Here is an excellent essay by Michael Rozeff which shows exactly why using the CPI in any form is problematic:

Inflation Is Worse Than You Thought

To summarize: 1) Measuring CPI is hard, so I use my own measure 2) We've had lots of inflation over the last 50 years. I don't see how this relates to CPI manipulation or conspiracy, or hyperinflation, or anything else.

 

[StuartR]

To summarize: 1) Measuring CPI is hard, so I use my own measure 2) We've had lots of inflation over the last 50 years. I don't see how this relates to CPI manipulation or conspiracy, or hyperinflation, or anything else.

You're asking why we should care about how the inflation and GDP numbers are calculated.

Here is an excellent piece by Chris Martenson:

Fuzzy Numbers

Our economic recession, and possibly depression, can be partially explained by the extent to which we have chosen to provide ourselves with misleading economic data. Certainly if you share my concerns over stocks, bonds, and 401K holdings, or are a serious investor of any sort, you owe it to yourself to listen to this explanation of how wrong our measures of inflation and GDP really are.

At every turn, a new way of measuring and reporting was derived that invariably served to make things seem a bit rosier than they actually were. Economic activity was higher, inflation was lower (a lot lower), and jobs were more plentiful. Unfortunately, the cumulative impact of all this data manipulation is that our measurements no longer match reality. We are, in effect, telling ourselves lies, and these fibs serve to distort our decisions and jeopardize our economic future.

The social cost to this self-deception is enormous. For starters, if inflation were calculated like it used to be, Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are. Because Medicare increases are also tied to the CPI, hospitals are increasingly unable to balance their budgets, forcing many communities to lose services. These are real impacts.

But besides paying out less in entitlement checks, by understating inflation, politicians gain in another very important way.

Gross Domestic Product, or GDP, is how we tell ourselves that our economy is either doing well or doing poorly. In theory, the GDP is the sum total of all value-added transactions within our country in any given year.

Now let’s tie in inflation to the GDP story. The GDP you read about is always inflation-adjusted and reported after inflation is subtracted out. This is called the real GDP, while the pre-inflation adjusted number is called nominal GDP. This is an important thing to do, because GDP is supposed to measure real output, not the impact of inflation.

For example, if our entire economy consisted of producing lava lamps, and we produced one of them in one year and one of them the next year, we’d want to record our GDP growth rate as zero because our output is exactly the same.

So if we sold a lava lamp for $100 one year but $110 the next, we’d accidentally record 10% GDP growth if we didn’t back out the price increase. So in this example, the real lava lamp economy has a value of $100, while the nominal lava lamp economy is $110. But all we care about is the real economy, because we’re trying to measure what we actually produced.

Ah! Now we can begin to understand the second powerful reason that DC loves a low inflation reading. It’s because GDP is expressed in real terms. In the 3rd quarter of 2007, it was reported that we experienced a very surprising and strong 4.9% rate of GDP growth. At the time, there were many proud officials declaring that certain tax cuts were responsible for this excellent news, and so forth. Less well reported was the fact that nominal GDP was 5.9%, from which was deducted the jaw-droppingly low inflation reading of 1%, giving us the final result of 4.9%.

In order to believe the 4.9% figure, you have to first believe that our nation was experiencing a 1% rate of inflation during the same period that oil was approaching $100/barrel and inflation was obviously and irrefutably exploding all over the globe.

The same sort of statistical wizardry that we’ve explored here is performed on income, unemployment figures, house prices, budget deficits, and virtually every other government supplied economic statistic you can think of. Each is laced with a long series of lopsided imperfections that inevitably paint a rosier picture than is warranted.

In short, how can one make proper decisions on investing, saving or anything else for that matter, if your assumptions are based on false data supplied by the government while your real world purchasing power is getting blown away by the dollar printing machine and the spendaholics in DC?

 

[MichaelB]

You're asking why we should care about how the inflation and GDP numbers are calculated.

Here is an excellent piece by Chris Martenson:

No, I'm not asking that - not even wondering. Most people on this forum (and everywhere else) already care and many of us already know how inflation is calculated. The people you are linking are the ones that are confused.

In short, how can one make proper decisions on investing, saving or anything else for that matter, if your assumptions are based on false data supplied by the government while your real world purchasing power is getting blown away by the dollar printing machine and the spendaholics in DC?

There is no doubt CPI data is important to investors, just like it is important to everyone else. "False data supplied by government"? Right. So, I guess our "real economy" is 25% (or so) smaller than we think it is, the difference being all that inflation we aren't counting. So, if business profit margins are normally single or low double digit, and they have been raising prices for a decade without that being counted, why aren't their profit margins at 30%+ now? Labor and input costs have not risen by nearly that much.

 

[StuartR]

No, I'm not asking that - not even wondering. Most people on this forum (and everywhere else) already care and many of us already know how inflation is calculated. The people you are linking are the ones that are confused.


There is no doubt CPI data is important to investors, just like it is important to everyone else. "False data supplied by government"? Right. So, I guess our "real economy" is 25% (or so) smaller than we think it is, the difference being all that inflation we aren't counting. So, if business profit margins are normally single or low double digit, and they have been raising prices for a decade without that being counted, why aren't their profit margins at 30%+ now? Labor and input costs have not risen by nearly that much.

Please point out the points that are factually incorrect in either of the linked pieces.

What do you base your assumption on that input prices to business have not increased on par with output prices? When output and input prices rise together, profit and production are maintained?

 

[M Paquette]

I blame the Trilateral Commission. And the Bilderbergs... But we all know it's really the Bavarian Illuminati setting the overall policy as they plan or the eventual return of the Reptilians from Hollow Earth.

There must be a conspiracy involved, just to keep the Bureau of Labor Statistics, American Statistical Association, and the Billion Prices Project at MIT all correlated. If any of these were using the real data that ShadowStats makes available, we would all see The Truth behind the lies behind the truth!


http://bpp.mit.edu/usa/
http://www.bls.gov/cpi/tables.htm
http://www.bls.gov/cpi/data.htm

Oddly, I can't find an online source of the data used by ShadowStats right now. Damned Illuminati!

 

[REWahoo]

But we all know it's really the Bavarian Illuminati...

Don't they run the Austrian School of Economics? Or am I confused again...

 

[Animorph]

I've been living on a fixed budget with yearly CPI increases for 5 years now. We skipped a big 5% one around 2008 or so because that clearly wasn't going to be required. Seems to match our spending pretty easily, with no changes on our part.

If you don't like the number, don't use it. It is what it is, and there is some transparency in its calculation.

 

[grasshopper]

I have been retired 6 years, living on cat food. I clip coupons when the price goes up.

 

[MichaelB]

We've had our fun but this discussion is off topic and unfair to Bluemoon. Anyone interested in analyzing the finer points of inflation conspiracy is welcome to start a new thread on that topic. Let's not continue it here.