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Old 12-05-2008, 07:06 PM   #41
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Originally Posted by lucija View Post

On a separate note, in the future, I foresee higher taxation across the board. I don’t know whether ROTH will ever be taxed, but I would not be surprised if additional contributions/conversion are disallowed at some point in the future. For some reason, I see the most likely way to increase tax revenue is to institute VAT-like tax in addition to current fed/state/other taxes. Yes, this would indirectly trigger ROTH taxation, but it is not like any other saving vehicle would be immune to this type of tax.
Well, we LBYM types would certainly know how to deal with VAT!
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Old 12-06-2008, 05:10 AM   #42
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Since ER in '05, I've been annually converting enough Trad. IRA $ to ROTH IRA in order to use up the 25% tax bracket. I may extend that into the 28% bracket. Rough calc. suggests that by the time I reach RMD at 70.5, I would be forced into at least the 28% bracket (if not higher). Guess it's good news/bad news. Hate paying taxes, but nice to have enough in IRAs that RMDs are significant.

Certainly hope we don't go to a VAT tax - especially not in addition to all other current types of taxes. Double, even triple taxation would ensue (maybe quadruple or higher if you live in Hawaii!!) as you withdraw your ROTH money.
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Old 12-06-2008, 03:41 PM   #43
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Certainly hope we don't go to a VAT tax - especially not in addition to all other current types of taxes.
I'm not sure whether a VAT or an excise tax is more painful...
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Old 12-06-2008, 11:43 PM   #44
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Originally Posted by baldeagle
I already did my annual conversion last February, hoping further growth of converted assets would take place in Roth accounts. I convert enough annually to max out the 15% bracket. Now, of course, I wish I'd waited. So many more shares could have been converted at today's prices for the same tax bill. C'est la vie.

January 2009 is coming soon, and if the market's still down I will get a larger share conversion this time around.


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Couldn't you do a recharacterization to effectively "undo" this conversion and then redo? There are some rules that you'd have learn about how/when to do redo.

From Fairmark.com
Market losses after conversion. You made a good conversion and you still like the idea of a conversion — but you wish you hadn't done it so soon. Your Roth IRA suffered market losses after the conversion, and that means you would report less tax if you were converting now. Here again you can use this rule to undo the conversion — and then do a new conversion later. If your investments are still at the lower value when you reconvert, your tax cost will be lower. Regulations place some restrictions on your ability to do this, but in the right situation you can still use this technique to lower your taxes.
Kaneone,

Yes I could recharacterize, and I have given some thought to doing so. But that has too many negative side effects:

  • I lose a year's worth of conversion when I re-characterize. I am on a plan to convert to the max of the 15% bracket every year until age 70.5, trying to minimize amount of MRDs thereafter.
  • Re-characterization of the original dollar amount would require me to put more Roth shares back into IRA than what I converted. That not only undoes this year's conversion but part of last year's as well. Again, contrary to my plan.
  • Those additional shares that would go back to IRA originally had taxes paid on their conversion. How do I get those taxes back?

I'm just not seeing a benefit to re-characterization for my situation. Do you?
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Old 12-07-2008, 01:24 AM   #45
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baldeagle,

I've never done a conversion, much less a recharacterization, in my life so I'm sure you know more than I do. I've been trying t learn tho and have seen some interesting stuff elsewhere. I may have some it confused so pls take it as food for thought only.

"I lose a yrs worth of conversion"---is that because after you recharacterize, you can't convert again till next yr? (and 30 days from the recharacterization). My impression was that is true for those recharacterized $$ but that you could convert other funds (if available) and, if they are coming from the same account, you might want to do that first to show they were not the recharacterized funds.

"Recharacterization takes back more shares than converted this yr and causes double taxation".......perhaps too late for this time around, but what I think I learned is that this problem was caused by putting your conversion into an existing Roth?
Depending on the performance of the other investments in the Roth, you might end up better or worse when you recharacterized. The fix is to put your conversion into a separate quarantine acccount until you are sure you are not going to recharacterize.....that way, if you do rechacterize, the same shares will come out. You could merge the Roths later once you know you will not recharacterize but should quarantine new conversions.

As for the tax effects, I haven't worked through any real examples so I don't know but if you will gain some from recharacterizing and will lose out from previous taxes paid, I guess you would have to net them out and see if you had a net gain or loss from the composite of all your actions. Not something to do on a whim.

The other discussions I saw were on irahelp.com and fairmark.com.
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Old 12-07-2008, 01:08 PM   #46
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I lose a year's worth of conversion when I re-characterize. I am on a plan to convert to the max of the 15% bracket every year until age 70.5, trying to minimize amount of MRDs thereafter.
You'd lose a year that you wouldn't need anyway. You may have lost a year of your schedule, but you've probably "lost" enough assets during that time that you wouldn't need that extra year. You'd be converting fewer assets (and paying lower overall taxes) so you'd be able to fit the whole conversion within a shorter timeframe.

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Originally Posted by baldeagle View Post
Re-characterization of the original dollar amount would require me to put more Roth shares back into IRA than what I converted. That not only undoes this year's conversion but part of last year's as well. Again, contrary to my plan.
Circumstances have changed, so change the plan. Fewer assets don't need as much time to convert. The money that's going back into the traditional IRA (undoing part of another conversion) is also being recharacterized but it's not being taxed again. It's just moving numbers around on IRS Form 8606.

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Originally Posted by baldeagle View Post
Those additional shares that would go back to IRA originally had taxes paid on their conversion. How do I get those taxes back?
File an amended return or, as I've seen some locals do, pay estimated taxes and (if you meet the requirements) extend your filing until Oct. The latter way allows you to make the final recharacterization decision before filing your tax returns.

At some point the tax savings (especially in the 15% tax bracket) isn't worth the hours it'd take to complete the recharacterization/amendment/reconverting process. In our case we were able to substantially accelerate our conversion timeline and our time/efforts are better spent on other, more productive/profitable, projects. But I'm sure that a number of extremely patient tax accountants are making a great living out of filing paperwork for frustrated market timers.

Kaneohe's pointed out two of the Internet's best websites for digging into the details. The CPAs on Ed Slott's board, in particular, publish a number of articles and seem to live to answer the most obscure, abstruse questions.
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