Taxes on retirement accounts have gotten too complicated

[soupcxan]

We may be over the income limits for Roth contributions next year and I was interested to see this article on funding a non-deductible IRA and then converting it to a Roth in 2010 when the income limits expire. But after wading into the details I don't even know if its worth it. It would seem to create more accounts (plus everything x2 for the spouse) and more record keeping, and more conversions to remember to proccess, and a larger hassle at tax time, and it seems like it would pull forward some tax liability from my current tax-deferred accounts (because the IRS assesses the taxability of your conversion based on all your retirment accounts, not just the one you want to convert).

The IRA loophole you don’t want to miss - Ask the Expert

If it's going to be this complicated for what appears to be a small advantage, I might as well just fund a taxable account.

 

[TromboneAl]

Perhaps you can quantify the advantage, based on some reasonable assumptions, and decide whether it's worth the hassle. For example, "We'll save $6,000 in 2020 -- is that worth several hours of intellectual grunt work?"

 

[FinanceDude]

We may be over the income limits for Roth contributions next year and I was interested to see this article on funding a non-deductible IRA and then converting it to a Roth in 2010 when the income limits expire. But after wading into the details I don't even know if its worth it. It would seem to create more accounts (plus everything x2 for the spouse) and more record keeping, and more conversions to remember to proccess, and a larger hassle at tax time, and it seems like it would pull forward some tax liability from my current tax-deferred accounts (because the IRS assesses the taxability of your conversion based on all your retirment accounts, not just the one you want to convert).

The IRA loophole you don’t want to miss - Ask the Expert

If it's going to be this complicated for what appears to be a small advantage, I might as well just fund a taxable account.

First of all, it's YOUR choice, based on YOUR circumstance. In our case, our qualified accounts are much larger than our taxable ones. We plan on taking the tax hit in 2010 versus a potentially much larger one later. Also, I am almost certain that the loophole will disappear, and I think Roths will be eliminated alltogether in the next few years. The Fed has too many bills to pay to give the US taxpayer any real help........

I don't think there's a "bad" way to look at it.........

 

[Nords]

But after wading into the details I don't even know if its worth it. It would seem to create more accounts (plus everything x2 for the spouse) and more record keeping, and more conversions to remember to proccess, and a larger hassle at tax time...

FWIW the "wading into the details" part is way more eyeball-glazing than the "filling out Form 8606 part". I went through this on another board and was eventually told by the CPAs that I should stop trying to interpret the tax code and just plug the numbers.

Savings of $200-$1000 each time I spend a couple hours of labor. And it's a lot cheaper than having to pay a tax prep accountant $500 to push the "I believe" button.

... and it seems like it would pull forward some tax liability from my current tax-deferred accounts (because the IRS assesses the taxability of your conversion based on all your retirment accounts, not just the one you want to convert).
If it's going to be this complicated for what appears to be a small advantage, I might as well just fund a taxable account.

In our case that "small advantage" will compound for at least another 20 years and avoid RMDs that would boost us right up into the 25% tax bracket... to say nothing of incurring additional Social Security taxes.

Spouse has finally stopped generating earned income so we shouldn't have the contribution hassle anymore. And we have plenty of time to do a little bit of the conversion every year until we've eliminated the conventional IRA accounts.

Considering all the other issues surrounding the conversion decision, I think that the research and the paperwork are the smallest parts of the debate.

 

[DblDoc]

I'm in a similar situation. The advantage is not just in how much you may save in the long run tax wise in the Roth account but also in the flexibility you will have in terms of when and where to draw from in retirement in order to minimize your tax burden each year. As much as I agonize about decisions about how to accumulate I foreseee the withdrawal part as the more challenging. I thought retirement was supposed to be all fun and no w*rk!!

DD

 

[harley]

I'm with Nords and Dbldoc. I agree it's a pain to crunch the numbers, but it could save you tons in the future. And in regard to Nords' comment on being pushed into the 25% bracket I can only say "you hope". I think taxes are going up, so the numbers will shift.

Also if you are at all concerned with leaving a taxable estate, don't forget to factor that into the considerations for doing the Roth. It's a much better thing to leave behind than a traditional IRA.

 

[Nords]

... on being pushed into the 25% bracket I can only say "you hope".

Congress called-- they say they can arrange to make everyone's tax rate exceed 25% beyond our wildest dreams!

It would be quite annoying to finish a Roth conversion at age 69 and have Congress find a way to tax the result. (Just as they've managed to do with Social Security.) However that's no excuse for inaction, either-- we have to do the best we can with what we have at a time when I doubt that tax rates will ever be any lower.

 

[Madison]

We're planning on using this, but moving all deductible money back to a 401k first. That way we won't have any taxes due in the first year. Then (after my job ends), we'll roll the 401k back to an IRA and move a little bit each year to a Roth, controlling the tax bill each year.

I'm surprised that the article did not mention that conversions can be withdrawn tax free after five years. A key point for the ER crowd.