Think twice before converting to a ROTH.

[cute fuzzy bunny]

Unless there is a change in the tax code to a flat tax or a national sales tax...

[Nords]

Quote:

Originally Posted by Cute 'n Fuzzy Bunny Unless there is a change in the tax code to a flat tax or a national sales tax...

Yeah boy, and I'm holdin' my breath about that one!

[cute fuzzy bunny]

20-25 years is a long time...

[Nords]

Quote:

Originally Posted by Cute 'n Fuzzy Bunny 20-25 years is a long time...

Not as long as the decades I'll have after I hit RMD to say to myself (and anyone foolish enough to wander in range) "I coulda, shoulda, woulda..."

[cute fuzzy bunny]

Bet we have a vastly different tax scheme before we have nationalized health care...

I'm gonna split the difference. By the time we get there, our roths and (my ira+wifes403b) should be about the same amount.

If my biggest problem is paying tax on the oodles of money pouring out of our accounts, i'm ok with that.

[Nords]

Quote:

Originally Posted by Cute 'n Fuzzy Bunny Bet we have a vastly different tax scheme before we have nationalized health care...

So now we're both holding our breath.

BTW nice avatar. It ain't la vida loca but it's the next best thing!

[cute fuzzy bunny]

I'm going to say something frightening, but I'd rather spend time with him than with vida.

Damn i'm old.

Whenever you put glasses on him, he waits a second, then slides them down his nose, then takes them off. Got him on video doing it, with me saying "hey baby...whats your sign?" Cracked up the grandparents pretty good.

I'm thinking within 10 years, maybe 12...for both.

[Nords]

Quote:

Originally Posted by Cute 'n Fuzzy Bunny I'm thinking within 10 years, maybe 12...for both.

I wonder if it'll be Jeb Bush or Hillary Clinton?

I'm thinking about two more decades of legislative gridlock. Maybe three.

[MJ]

Quote:

Originally Posted by mathjak107 lets not forget that rates dont have to end up being higher when we retire...there are 2 ways to pay the huge federal deficit...increase taxes or print money...since politically increasing taxes isnt good ,sneakly printing money sounds more likely.....

Doesn't really make a difference, if you need and get a real annual $50k income then,

income with higher taxes $40k (expenses) + $10k (taxes)
income with higher expenses and lower taxes $45k (expenses) + $ 5k (taxes)

Just another shell game

[cute fuzzy bunny]

Mmm hmm...one makes the money worth less, one takes the money away directly. One is more easily avoidable than the other...

[retire@40]

Quote:

Originally Posted by Nords If you can forecast that pension income or RMDs will put your income into the 25% bracket, and you're currently in the 10-15% bracket, then it makes sense to start partial Roth conversions up to the top of the 15% bracket.* It also beats starting 72(t)s or IRA withdrawals at 59 1/2, with their subsequent taxable investments, to reduce RMDs. That forecast is pretty straightforward...

That's if you know for sure there will be a 25%, 15%, and 10% bracket in 20 years and you know the income levels for each bracket.

But at least you have a long-term forecast that you can adjust as the tax laws and rates change.

[Nords]

Quote:

Originally Posted by retire@40 That's if you know for sure there will be a 25%, 15%, and 10% bracket in 20 years and you know the income levels for each bracket. But at least you have a long-term forecast that you can adjust as the tax laws and rates change.

Hey, if I knew the rates of return for various asset classes for the next 20 years then I suspect that I'd be changing my allocation, too.

If I'm driving down the highway and the car in front is getting closer, I don't stay in that lane hoping that the car will accelerate or pull over-- or sprout wings & fly away. I change lanes and pass it. Waiting until I hit its bumper doesn't solve the problem very well.

If I can see that 20 years from now the current tax brackets & RMDs are gonna pound us hard, while today's tax rates are lower and arguably as low as they're likely to be in the last or next 40 years, then I'm going to take "advantage" of the situation. In 20 years we'll know who's being exploited, but I'm more inclined to predict Congress' future using Newton's First Law of Motion. Gridlock.

It'd be nice if we had an analogous Gordon equation for the Congressional tax situation, but I don't know of one. I'll go with history & reversion to the mean!

[ESRBob]

Back to the Roth vs regular IRA -- and ignoring for the moment any uncertainty about future tax rates.. (I think if you harvest your 10% and 15% brackets for conversion the whole point is moot in favor of Roth)

If you were able to convert a regular IRA to Roth, paying the taxes with taxable savings (thereby keeping the full amount in the Roth) then my calculations (back of the envelope) say you have to be ahead no matter what, since you've effectively bumped up the amount of assets you've got growing tax free.

Also I haven't done the equations on this but it seems clear to me that if you 'pay your medicine' by paying Roth conversion tax now on a small asset base, then have 40 years or so of compounding appreciation in the Roth you have to be way ahead of the guys leaving the funds to grow the same amount over those decades in a taxable IRA who then must pay tax on the entire large amount, no? What am I missing? Does the whole thing depend on an assumption that the money you used to pay the Roth conversion taxes would have appreciated the same as IRA money and therefore grwo to the same amount you'd pay in taxes at conversion time? My response would be that nothing outside an IRA can grow as big as something inside an IRA because of the tax-free compounding, which can be a big deal over several decades, so Roth conversion (with taxes paid with taxable funds) still wins.

Also, RMDs are especially awful if your taxable portfolio has grown to the point where you don't actually need the money and want to pass the Roth to your heirs.

[mathjak107]

you would think paying the taxes earlier on the smaller amount would be the winner but the truth is the amounts at the end between a roth or traditional work out exactley the same assuming same tax rate.ya can pay me now or pay me later but ya pay me ha ha aint it the truth

[obryanjf]

Mathjak107, I've done this formula before and believe you right on. What many leave out of the return calc/ terminal value calce is the amount of taxes to pay the conversion. Outside or inside it is part of the ultimate basis (not in tax sense) and makes the Roth = Trad IF present and future tax rates are the same.
My question is do I trust to to have the govt have a lein on my Trad account forever. NO. I will be converting to the 10 or 15% bracket over time, when I semi retire, or retire.

job

[cute fuzzy bunny]

I did the calc both ways. There was a very low five figure difference in favor of the roth vs ira, with low seven figure numbers for both...in other words, a little 'drift' in taxes or returns one way or the other and the diff was wiped out.

[Andre1969]

I have made a lot of stupid mistakes also. To quote Uncklemick - 'My best moves have been to do absolutely nothing'

Ain't that the truth! Sometimes I think I'm my own worst enemy when it comes to investing. I mean, I've done all right, but there have been many cases where I would have been better off just letting my money sit in one investment, instead of selling and then moving it to something else.

I recently played around with one of my old 401k's, which is with Boeing. It had been allocated something like 80% Boeing common stock and 20% S&P fund. Well, I ended up taking $1000 out of the common stock and putting it into a small/mid-sized company growth fund. The whole 401k was only worth around $10,000, so it's not like even a fatal error is going to kill me. Since I made that switch, the small/mid fund has gained about 2.7%. Not bad, in a month and a half. But the Boeing common stock? Well, it shot up around 10-11%!

Oh well, in the long run things will tend to even out. Must think long-term, must think long-term.

As for a Roth IRA, I converted a regular to a Roth back in early 2000, and after the tech burst, 9/11, and the recession, I did lose out. Big-time. 2 of the 3 Janus funds I bought at the time are STILL not back to that 2000 share price! Although with dividends, capital gains payouts, etc, they have gone back to a profit. Still, I probably would have done better to just let that money sit in the regular IRA it was in, paying those crappy CD rates. Now money I sunk in as the markets plummeted has shown a nice return, but that original 2000 investment money has not.

Nowadays I couldn't do a conventional IRA if I wanted to, because I contribute too much into my 401k.

[Nords]

Quote:

Originally Posted by ESRBob If you were able to convert a regular IRA* to Roth, paying the taxes with taxable savings (thereby keeping the full amount in the Roth) then my calculations (back of the envelope) say you have to be ahead no matter what, since you've effectively bumped up the amount of assets you've got growing tax free.

Big improvement. Bruce Steiner, a CPA on Ed Slott's IRA discussion board, compares this to making a "free" IRA deposit and letting it compound forever. This is probably the biggest payoff of a Roth IRA conversion, but of course it requires liquidating investments from taxable accounts (paying even more taxes up front) and trusting the govt not to mess with your bright idea for a few more decades.

Quote:

Originally Posted by ESRBob Also I haven't done the equations on this but it seems clear to me that if you 'pay your medicine' by paying Roth conversion tax now on a small asset base, then have 40 years or so of compounding appreciation in the Roth you have to be way ahead of the guys leaving the funds to grow the same amount over those decades in a taxable IRA who then must pay tax on the entire large amount, no? What am I missing? Does the whole thing depend on an assumption that the money you used to pay the Roth conversion taxes would have appreciated the same as IRA money and therefore grwo to the same amount you'd pay in taxes at conversion time?

As other posters have pointed out, taxes now are the same as taxes later when paid from the IRA's funds. The end result doesn't change if the tax rates don't change. But like a good nuke, I spent a couple hours building a spreadsheet to prove that I couldn't think through the problem without a Microsoft product assist.

The reason that I'm aware of this issue is from all the Roth IRA conversion threads I've read over the years. They usually start with someone asking about a conversion, followed by another poster "proving" that the conversion doesn't make a difference if tax rates don't change, followed by a third poster pointing out the benefits of paying the conversion taxes with funds outside the IRA, and so on...

Quote:

Originally Posted by ESRBob Also, RMDs are especially awful if your taxable portfolio has grown to the point where you don't actually need the money and want to pass the Roth to your heirs.

This is where a fourth poster chimes in to point out that if your RMD is big enough, your taxable income rises high enough for Social Security distributions to also end up being taxed.

This "stealth tax" is a little difficult to incorporate into a Roth conversion spreadsheet but many 70-somethings are already feeling the pain.

A final point is that the process of a Roth IRA conversion is a fairly straightforward one-time calculation performed during your younger years when you think this stuff is interesting, or at least when you're capable of following the reasoning. (Admittedly if you do the conversion incrementally, then it may be five or six calculations.) Then you're done and you don't ever have to worry about withdrawing funds or calculating the effect on your taxable income. The only people who have to mess with Roth IRA distributions are your heirs, and presumably your legacy is adequate compensation.

However a series of RMDs froma conventional IRA, taken over the rest of your life, is a process that's fraught with danger. There's the possibility of mistakes, declining mental ability, confusing rule changes, and all sorts of other minefields that will trigger a tax penalty. It's lifetime employment for CPAs and a lifetime income stream for the U.S. Treasury...

[ESRBob]

Thx Nords --

Nice to know we followed the "script" again this time! I guess you follow more threads than the rest of us -- maybe you need to be out surfing more?

[markf57]

There appears to me to be another benifit of converting to a Roth that I don't see mentioned that much. When one converts to a Roth, you no longer have to worry about the 70 1/2 rules about required distributions and the taxes and penalties if you do that wrong. Am I right?