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Roth Conversion and Content
Old 03-11-2009, 10:13 AM   #1
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Roth Conversion and Content

We have some inheritance money coming this year and perhaps some more next year with the sale of some property. Saw a PBS special with Ed Slott (mentioned in another thread) addressing Roth conversion as a long term plan for avoiding future taxes. His conjecture is that our current deficit spending is going to make the Govt desperate for income down the road and baby boomer IRAs are going to get hit pretty hard. Paying taxes now for future tax break via Roth conversion has a chance to be a real long term winner.

We plan to do some conversion this year and use the afore mentioned inheritance for the spending money that would otherwise come from IRA. Any thoughts/ plans from others? Also, what kind of investment would you make in Roth (we are 64 and 60 years old)? Our Roths are currently 100% stock but am thinking may want to "middle of road" this conversion to something like Vanguard's Balanced Index.

Thanks for any input!... bill
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Old 03-11-2009, 11:28 AM   #2
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We've been roth converting for some years. If you've been 100% stocks why change now? Hopefully, your patience will be rewarded in future years. Our roths are 100% stocks and have similiar allocations to US and international as our non-roth accounts.
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Old 03-11-2009, 01:51 PM   #3
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What's your current marginal income tax bracket? What was it before you retired?
As for what goes in the Roth, that's easy: Put your tax inefficient investments in tax-advantaged accounts.
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Old 03-11-2009, 02:08 PM   #4
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We've been roth converting for some years. If you've been 100% stocks why change now? Hopefully, your patience will be rewarded in future years. Our roths are 100% stocks and have similiar allocations to US and international as our non-roth accounts.
Thanks for the response. You have a good point on going with stock. Still consider the Roths as last location to use, but don't want to get near to wanting to use it and have another drop like this one! May also begin taking out from Roth a little while still getting most of income from IRA to "manage" not going into a higher marginal rate later on.
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Old 03-11-2009, 02:11 PM   #5
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What's your current marginal income tax bracket? What was it before you retired?
As for what goes in the Roth, that's easy: Put your tax inefficient investments in tax-advantaged accounts.
Thanks for replying. We try to manage our IRA withdrawals up to, but not over, the 15% bracket. I understand the tax efficiency issue; am thinking about growth vs volatility in considering how much stock vs bond we put in Roth versus regular IRA.
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Old 03-11-2009, 02:19 PM   #6
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I have plenty of space in my taxable accounts that I use for tax-efficient index funds of stocks. I use my IRAs for my fixed income assets. In that way, I get tax deferral on the income generated, but also my "tax-advantaged space" does not suffer in large market downturns such as we are experiencing now. Since I cannot simply "top up" my tax-advantaged accounts after a huge drop because of contribution limits, I like the fact that they don't suffer as much as my taxable account does. And the losses in my taxable account are deductible to a large extent.

Thus, I do not advocate putting volatile assets that can lose money in a Roth IRA when one is near retirement age. Of course, if you don't have taxable assets to hold your volatile assets, then what I wrote is kind of moot.
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Old 03-11-2009, 02:22 PM   #7
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If at some point you will be retired and spending money from taxable accounts, that would be the best time to convert to Roth. That is, if you have no income at all, you can choose an amount for Roth conversion that will keep you in a zero or low tax bracket.

We converted $33,000 last year and paid zero fed tax on it.
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Old 03-11-2009, 02:37 PM   #8
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William,

With the blessings of my CPA, I converted 50K in Roth assets for tax year 2008, in December of 2008, at greatly diminished asset values, hence with potentially greatly diminished tax liability from a long-term perspective. I'm a 50-year old retiree, so I have some time to allow these assets to rebound before divestiture. I also did 200K in tax loss harvesting in December 2008. May as well make some lemonade from all the lemons in my portfolio.

My CPA is currently handling my 2008 return. He has been instructed to keep me at the upper limit of the 15% tax bracket. As explanation, I intentionally over-converted. Any excess from the 50K conversion which puts me beyond the 15% limitations will be "re-characterized", ie converted from my Roth back to my traditional IRA, by April 15, 2008, at no penalty whatsoever; it will be accomplished by a simple phone call to Vanguard. The final conversion amount, therefore, will be determined by the tax tables.

I also converted another 30K in January 2009, for the reasons outlined above. Finally, as I and others have noted before, there are special favorable conversion rules applying to conversions made in 2010. I've altered my tax-planning strategy and chosen to convert some before then, rolling with the punches in this market meltdown. You can google for the details of the 2010 conversion provisions; I can't type very well, so I've about hit my limit for one post. The markets have knocked the wind out of my investments, but I will at least realize tens of thousands in future tax savings via the strategies I've instituted. I'm retired now. I have the time to learn how to save tens of thousands in taxes.

Tom
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Old 03-11-2009, 03:01 PM   #9
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Good news/bad news - I'll not get all my IRA/401(k) holdings re-characterized to Roths before I reach 70 1/2. I try to hold my tax bracket to 25%. I am complaining and not bragging, just in case anyone wonders.

I agree with William (and Ed Slott) that anyone with money will be a tax target soon. Politics aside, the only place to get money is from folks who have it. With the assumption that they won't renege on the Roth non-taxability, that will at least be one place to stash some cash. Of course, it won't surprise me if they add some sort of "national sales tax" to get Roth money back through the back door (with generous rebates or tax credits for the bottom XX% voting block - oops! Said I wouldn't get political.)
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Old 03-11-2009, 03:22 PM   #10
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(FAQ archive) Should I convert my IRA/401(k) to a Roth or not?
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Old 03-15-2009, 12:51 PM   #11
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Nords - thanks for the reference to other conversation. I wouldn't have found it on my own!

We have decided to do a conversion in 2009 and tentatively again in 2010.

1) Govt is going to be desperate for money in future, so feel taxes are likely to be higher down the road

2) This year market down, so a good time for selling assets low for taxable purposes and then "buying back" in Roth.

3) May again next year because of one time tax law event which lets you spread tax liability of 2010 conversions over two years.

Thanks again for the feedback.
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You need a ROTH account opened by year you want to convert
Old 03-15-2009, 01:36 PM   #12
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You need a ROTH account opened by year you want to convert

Hi,

IMPORTANT.

I tried to do a roth conversion a few weeks ago for 2008.

I can't.

The actual conversion is taxable in the year you do it. I needed to do it by 12/31/08 or it's too late for 2008.

Going forward. Be sure to have a ROTH account opened and fund it before December 31st....

Glad it happened this year and not in 2010 when I hope to convert a sizeable chunk of money...

W
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Old 03-16-2009, 10:51 AM   #13
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Is anybody worried that the Gov might find a way to tax Roth withdrawals
sometime in the future, like going to a "Fair Tax" for example, or some other form of consumption tax like a national sales tax? Personally, I
think the chance is pretty remote but you never can be sure what a tax
hungry Congress might dream up.

Cheers,

charlie
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Old 03-16-2009, 10:57 AM   #14
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I agree, the chance is remote, but that's one reason I don't convert even more.
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Old 03-16-2009, 11:16 AM   #15
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If we got a national sales tax it seems improbable that they'd completely drop the income tax and especially for tax deferred accounts from which we are converting to Roth's. So if you are converting up to the 15% rate (and really lower when you consider the blended actual rate) I'd guess that is the best way to go.
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Old 03-16-2009, 11:20 AM   #16
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Quote:
Originally Posted by TromboneAl View Post
If at some point you will be retired and spending money from taxable accounts, that would be the best time to convert to Roth. That is, if you have no income at all, you can choose an amount for Roth conversion that will keep you in a zero or low tax bracket.

We converted $33,000 last year and paid zero fed tax on it.
I can never understand this point. Are you spending solely from loss making equity accounts that throw off no dividends? Because if you have any fixed income investments you would have interest, right?

Ha
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Old 03-21-2009, 11:26 AM   #17
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Nords - thanks for the reference to other conversation. I wouldn't have found it on my own!
*Sigh*. No one reads the freakin' FAQs.
You're welcome!

Quote:
Originally Posted by charlie View Post
Is anybody worried that the Gov might find a way to tax Roth withdrawals
sometime in the future, like going to a "Fair Tax" for example, or some other form of consumption tax like a national sales tax? Personally, I
think the chance is pretty remote but you never can be sure what a tax
hungry Congress might dream up.
If I held off my investment planning while waiting for Congress to help me make up my mind, I'd be paralyzed with fear. Or laughter.

Under current conventional IRA RMD requirements, we can already look ahead to much higher taxes. When the conversion can be done at lower tax rates (and, in a bear market, at lower tax costs) then there doesn't seem to be any reason to play extra rounds of "what if" or hope for Congress to "solve" our problems.

In our case we've been accelerating the Roth conversions for college planning. Our kid's college FAFSA will look at our 2009-2012 tax returns, and I don't want to have to explain the nitty-gritty details of Roth conversions so we're hoping not to do any during those years. Our kid will probably do NROTC or USNA anyway, but it seems reasonable to keep our options flexible.
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