The right way to go about it (Roth IRA)?

[mathjak107]

the slight trade off in tax on the marginal amount is way offset by having the extra dough growing for you all those years that you would have payed up front as tax

[REWahoo]

Originally Posted by mathjak107

the slight trade off in tax on the marginal amount is way offset by having the extra dough growing for you all those years that you would have payed up front as tax

Is this the same reasoning you used to decide it was way better to lease than buy a car?

[mathjak107]

well we dont want to start the lease vs buy thing again,but the fact is yes depending on how long you intend to keep the car the lease is the better deal if you like a new car every 3 or 4 years....especially if you trade the car in back to the dealer at the wholsale price like most people do....

i believe the figures were over 80% of retires are in the 15% or lower bracket...some of us may not be but most of america is

[REWahoo]

Originally Posted by mathjak107

i believe the figures were over 80% of retires are in the 15% or lower bracket...some of us may not be but most of america is

So, for those of us in the 20% who are/will be above the 15% bracket, this...

Originally Posted by mathjak107

the slight trade off in tax on the marginal amount is way offset by having the extra dough growing for you all those years that you would have payed up front as tax

...isn't necessarily true.

[Nords]

Originally Posted by mathjak107

the slight trade off in tax on the marginal amount is way offset by having the extra dough growing for you all those years that you would have payed up front as tax

In just about every Roth IRA conversion discussion in which I've participated, I've pointed out that the conversion taxes should be paid from funds outside of the IRA.

[mathjak107]

then you lost the use of the funds outside the ira,either way you got a chunk of dough thst vanished and vanished for the gov't's benefit.not for most of us...bottom line is if you think a roth or roth conversion is a good deal for you than do it, i prefer not to plan around what if's and speculate taxes may be higher somewhere off in the future ..i prefer to plan around what makes most sense to me right now and that is i dont see taxes being higher in the future and i dont want to pay 1 penny more in tax today then i have to...

[Nords]

Originally Posted by mathjak107

i dont want to pay 1 penny more in tax today then i have to...

I used to think that too, until I realized that my tax bracket when I had to start taking RMDs would be higher than my tax bracket is now.

That's all the math I needed to make a decision.

[astromeria]

When my husband fully retires, I'll have to wrestle with this issue. 2/3 of our $$ is in taxable accounts, and his pension is tiny. I'll have to figure out if it makes more sense to do Roth conversions or not, for both of us or not, to the max or not, start taking income from the IRAs or not. Sounds awfully daunting. One thing I'm (currently!) sure of is taking Social Security at the earliest opportunity--bird in the hand and all that.

[mathjak107]

Originally Posted by Nords

I used to think that too, until I realized that my tax bracket when I had to start taking RMDs would be higher than my tax bracket is now.*

That's all the math I needed to make a decision.

the question i have is though,were you in a higher tax bracket when working than you are now even with the rmd's?

[Nords]

Originally Posted by mathjak107

the question i have is though,were you in a higher tax bracket when working than you are now even with the rmd's?

The short answer is "Yes".

The long answer:
I started contributing to an IRA in the early '80s but 1986's tax reform took away the deduction.* We made non-deductible contributions to conventional IRAs from then until I retired in 2002.* We started Roth IRAs in 2003.

Between 1988-2001 my annual earned income was between $40K-$60K and spouse was roughly the same.* I don't remember the tax code's brackets but our spreadsheet shows that from 1983-2001 we've paid between 16-23% federal income taxes.*

I have a $35K annual pension (subject to federal tax) and our deductions will no longer beat that down below the 15% bracket.* So when we pay our taxes today, without salary or RMDs and only living off a pension & SWR, we're starting in the 15% bracket.

If I had to start taking RMDs in 2031 (and spouse in 2032), I suspect our ~$100K IRAs would have doubled at least twice (Rule of 72 divided by 6% implies doubling every 12 years, an extremely conservative tax-deferred assumption) producing a $400K balance with an RMD of $400K/27.4=$14.6K/year each for myself and my spouse.* I suspect that our IRAs will easily achieve an 8% APY and have a value closer to $650K, which would be a pair of RMDs of nearly $24K each.* If today's married/joint 15% tax bracket rose at 3.5%/year inflation for the next 25 years from $61,300 to $145K, the 10% bracket would only rise from $15,100 to $36K and the COLA'd pension would rise from $35K/year to $82K/year.* Even with inflation-adjusted brackets and lower IRA RMDs we'd still be in the 15% bracket.* If the IRAs do well and RMDs are higher we'd be pushing the top of the 15% tax bracket.

Spouse starts pulling down her military pension in 2022.* That'll put us solidly in the 25% bracket without enough deductions to ever see 15% again.

I didn't add in the effects of Social Security but spouse and I will be pulling down approx $10K/year at age 62.* Of course if we were confronted with that RMD math we'd be tempted to hold off until age 70.

Things could change.* Congress could lower taxes even further, the nation could adopt a flat-tax code with few (if any) deductions, and SS could go bankrupt.* But when I look back over Congress' past 25 years of achievements, I suspect that the next 25 years will be pretty much more legislative gridlock.* When you consider the effects of a rising deficit and a dropping dollar, I find it hard to believe that anyone can lower taxes.* In fact 78 million voting Baby Boomers will have plenty of motivation to make sure that Congress taxes the hell out of the slackers adopts fiscally prudent measures to reduce the deficit, maybe even reduce the national debt, and restore SS's viability.

So I can do enough math to confidently predict that in 25 years I'll be dealing with a hairball of RMDs and paying taxes in at least the 25% bracket.* It seems advantageous to exploit our current temporarily lower incomes to convert to Roth IRAs in order to avoid RMDs & higher taxes altogether.* I suspect that's a lot more likely to occur than having Congress swoop in to save us, so I'm gonna pay taxes now.

This is not a simple situation.* Conversions are affected by at least six factors (present & future income, present & future tax brackets, Social Security income, and paying conversion taxes with funds outside of the IRA).* You can't apply a few thumbrules to an inherently complex formula with multiple factors and expect it to apply to even a large minority of the crowd.*

But Roth conversions might not make sense for everyone.* Everyone has to do their own math for their own situation.* What's your math show for yours?

[mathjak107]

as it stands now we would be borderline 25% at retirement..we are both still working and depending on the year we are 25-33% now....however we are not retiring for a few years and with every year the brackets for 15% extending upward by about 3,000 we may be fully only 15% at retirement...thats why i cant see us being higher at retirement...we are also in a high tax state ,new york which we wont be at retirement...for us a fully deductable ira and 401k beats a roth hands down.....

[pfpelican]

Originally Posted by Nords

But Roth conversions might not make sense for everyone.* Everyone has to do their own math for their own situation.* What's your math show for yours?

I expect converisions will help me too.

In 5 years, at age 70, my ss payment (with spouse benefit) will be about $49,000 per year.

1/2 that coupled with RMDs of about $20,000 per year, starting that year (2012) will put me over the $44,000 level, causing 85% of my ss benefit to be taxed at ordinary income tax rates.

However, by converting some of my IRA dollars to Roths beforehand, I can reduce that RMD to $17,000 or below.

That will reduce my taxable ss benefit to the 50% level.* Nothing will get us below $32,000.

So converting now, and biting the small tax bullet now, has the potential of saving me lots of taxes on ss benefits for lots of future years.

Sure wish they'd index those $44,000 and $32,000 levels.

pp

[FinanceDude]

Originally Posted by pfpelican

I expect converisions will help me too.

In 5 years, at age 70, my ss payment (with spouse benefit) will be about $49,000 per year.

1/2 that coupled with RMDs of about $20,000 per year, starting that year (2012) will put me over the $44,000 level, causing 85% of my ss benefit to be taxed at ordinary income tax rates.

However, by converting some of my IRA dollars to Roths beforehand, I can reduce that RMD to $17,000 or below.

That will reduce my taxable ss benefit to the 50% level.* Nothing will get us below $32,000.

So converting now, and biting the small tax bullet now, has the potential of saving me lots of taxes on ss benefits for lots of future years.

Sure wish they'd index those $44,000 and $32,000 levels.

pp

Smart...............good for you!!