FUEGO
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- Joined
- Nov 13, 2007
- Messages
- 7,746
I'm faced with a dilemma that must be answered by the end of 2010.
I can either "tax gain harvest" and increase my cost basis in my taxable investments by $23000 or I can make a $10,000 Roth IRA contribution (instead of a Traditional IRA contribution). Taking the $23000 in stepped up basis will cost me $300 more in taxes this year versus the $10,000 Roth IRA contribution. But that tax cost is minimal as compared to the possible tax advantages of having a stepped up basis or $10,000 more in the Roth IRA (instead of traditional IRA).
I'm trying to figure out what factors are key to the decision. I think one key factor is time until withdrawal/sale for the Roth assets and the taxable assets. The value of the Roth contribution increases every year (as the invested assets grow), but the value of the stepped up basis decreases in real terms every year due to inflation (and ultimately the value of stepped up basis goes to zero if/when taxable assets are inherited).
To describe where I am financially, I'm roughly 5 years from planned retirement or very semi-retirement at age 35 and planning on some combination of 72t SEPP withdrawals from Traditional IRAs and selling investments from taxable accounts (plus spending dividends, cap gains distributions, and interest). Due to a few factors, I anticipate my ordinary income effective marginal tax rates to be 50-55% and my cap gains tax rates to be 40-50%.
I wanted to get your thoughts on which tax benefit you would pick today and why/what factors influence your decision. I am leaning toward the $10,000 in the Roth IRA right now. I think the benefits of the stepped up basis may not be realized for many years or decades and be very minimal by then, whereas the Roth IRA contribution will continue to grow and the value of the tax-free withdrawals later will be much more than the value of reduction in cap gains due to stepped up basis.
I can either "tax gain harvest" and increase my cost basis in my taxable investments by $23000 or I can make a $10,000 Roth IRA contribution (instead of a Traditional IRA contribution). Taking the $23000 in stepped up basis will cost me $300 more in taxes this year versus the $10,000 Roth IRA contribution. But that tax cost is minimal as compared to the possible tax advantages of having a stepped up basis or $10,000 more in the Roth IRA (instead of traditional IRA).
I'm trying to figure out what factors are key to the decision. I think one key factor is time until withdrawal/sale for the Roth assets and the taxable assets. The value of the Roth contribution increases every year (as the invested assets grow), but the value of the stepped up basis decreases in real terms every year due to inflation (and ultimately the value of stepped up basis goes to zero if/when taxable assets are inherited).
To describe where I am financially, I'm roughly 5 years from planned retirement or very semi-retirement at age 35 and planning on some combination of 72t SEPP withdrawals from Traditional IRAs and selling investments from taxable accounts (plus spending dividends, cap gains distributions, and interest). Due to a few factors, I anticipate my ordinary income effective marginal tax rates to be 50-55% and my cap gains tax rates to be 40-50%.
I wanted to get your thoughts on which tax benefit you would pick today and why/what factors influence your decision. I am leaning toward the $10,000 in the Roth IRA right now. I think the benefits of the stepped up basis may not be realized for many years or decades and be very minimal by then, whereas the Roth IRA contribution will continue to grow and the value of the tax-free withdrawals later will be much more than the value of reduction in cap gains due to stepped up basis.