Should I have an IRA?

[kaneohe]

Originally Posted by Art G

Uhhh, I've never heard that. You're telling me you have to convert all your IRA's or none? I don't believe that's correct.

What he is trying to tell you is that IRS treats all your traditional IRAs as one single IRA. You can convert just part of it if you like but it will be treated as coming from all your IRAs in terms of what fraction will be considered a taxable conversion and what part will be non-taxable.

Ex: all you have are non-deductible IRAs. The conversion will be tax free.

Ex: you have a small non-deductible IRA whose contribution is a small %
of the total IRA value. The conversion will be mostly taxable even if it only
came from that non-deductible IRA.

[Art G]

Aha. Thank you. From his example stated, he has had an IRA and a 401k, so the IRA's have had to be after tax I believe.-
I'm reading all the recommendations here and I can't think of a reason why you wouldn't want to convert at his age as soon as possible.

[mathjak107]

converting may or may not be a good idea. our big thing is i dont see being in a higher tax bracket with no paycheck coming in later on unless social security pays us 6 figures. and you have to figure in whether or not you will be living in another state. right now we live in nyc. when we retire we will live in PA. no comparison in state and local taxes . id never want to pay all that state tax on a conversion now i cant see much roth converting in the cards for us. in fact our state and local taxes are so high that just the combo of our income and the state and local taxes paid zonks us with an amt penalty.

only way i see a conversion paying off is if the market tanks big time. then do the conversion while its value is low and ride it back up tax free in a roth

[mathjak107]

Originally Posted by LOL!

Your IRA is just a complication in your life. You are not able to deduct from your income any of the contributions, but the earnings grow tax-deferred. That is, you have a non-deductible traditional IRA. Let's see what that gets you:
1. No tax deduction. Upon withdrawal your gains are taxed at your marginal income tax rate. Before withdrawal gains are tax-deferred.
2. If you die, your beneficiaries will pay taxes on it at their rate.
3. You have to fill out the pesky 8606 form when you contribute.
4. The amounts you can contribute are limited.
5. When you reach age 70.5, you must begin mandatory withdrawals and pay the taxes.
6. Penalties for early withdrawal before age 59.5.

In contrast, if you just contributed the money to a tax-efficient passively managed, very low expense ratio stock index fund, this is what you get:
1. No tax deduction, but upon withdrawal your gains are taxed at your much lower long term capital gains tax rate. Before withdrawal gains are tax-deferred.
2. If you die, your heirs get all the gains tax-free.
3. No pesky forms to fill out when you contribute, but you must save your annual statements so you can work out the cap gains in the future.
4. The amounts you can contribute are unlimited.
5. When you get old, you are not forced to begin withdrawals.
6. You can withdraw at any time. No penalties.

The idea that you can convert to a Roth IRA in 2010 is true. You will pay the taxes on any gains at your marginal income tax rate and then the funds will be tax-free. But at your marginal income tax bracket that's a big price to pay. Because these accounts are so small relative to the rest of your finances, they are not really going to make any impact.

So while I would not cash them in today, I would not contribute any more to them. I would convert to Roth IRA when I retired.

if you have a sizable ira and other assets and it looks like you will be over the estate exemption amount take some of your ira, pay the tax when your in a lower bracket and beyond penaly age , buy life insurance with the money making your ira beneficiary as the policy owner and pass many more times that amount tax free from the life insurance payout to your heirs and estate tax free if your subject to it.. you can save a ton of estate taxes later on by doing this. it makes the cost of insurance a drop in the bucket compared to the estate tax rate both federal and state

[Art G]

I'm going to refer back to the original situation....

Here's our situation:
-My wife and I have a combined gross income of roughly $300M.
-We are in our mid-30's.
-We just set up traditional IRA's for both of us 3 years ago. Each year, we have contributed the max amount ($4,000, $4,000, $5,000).
-We both max out our 401k and also have other money in taxable mutual fund accounts

So, he's not going to get bumped into a higher tax bracket.

He's only in his mid 30's so he's got 25 years of tax free growth to look forward to AND there's a good chance his IRA has dropped back in value recently.

He has only been in these IRA's for three years and thus should have very little in earnings so far.

If he's maxing out his IRA's and 401k's, he apparently isn't struggling currently to get by, nor does it seem he's likely to need to draw out the money early and pay a penalty.

So, he and his wife have about $26k combined in IRA's plus any earnings that will be taxable. If he's up 8% per year for the last three years than he will have an additional $6500 or so of taxable earnings. For the $2k or so he'll have to pay in taxes, he is gaining tax free growth forever after. At that same assumed 8% growth for 25 years will turn his $26k into $208,000 TAX FREE.
It's a no brainer....convert poste haste. JMO.

[scooter260]

Art, thanks for the great recap. That's exactly what I was thinking....very helpful to have someone else verify my thoughts. Based on all the feedback, I'm planning to convert both IRA's to Roths in 2010 and then continue contributing the annual max thereafter.