Roth IRA questions

[yakers]

Third TSP advantage: The G Fund.

Originally I didn't like this conservative fund but I was young and put everything in the C Fund (S&P500) which actually was a good thing at the time. But the G fund looks better in my old (55) age. It is a portfolio risk reducer and possibly the only bond fund (although it is not in itself a bond fund) that you need.

 

[spideyrdpd]

I am suprised no one discussed the fact that the roth gives you more options.

 

[mathjak107]

why does anyone think most people will be in a higher bracket not working than working? i have a problem believing that...with the baby boomers now being a major part of the population i cant imagine any politcal leader or group telling the baby boomers that they are raising their tax brackets...oh the social security taxes and medicare taxes may go up big time but i cant see tax rates.also look at how the brackets are raised every year.i think this year 15% may extend as high as almost 79,000.00 worth of income before deductions .at 65 you can get almost 81,000 in income pretax and be in the 15% bracket with a portiion even at 10% ...soon 15% may be 100,000 at this rate as the bracket for 15% has been rising at 1500.00 a year or more for the last decade..effectively most americans will probley be in the 12% overall tax area .i think the roth is just the gov't way of collecting taxes now that they may not collect later

 

[WRBT]

I might have misread (and I might be completely misunderstanding how taxes work) but I don't understand why someone would suggest regular savings after doing up to match on 401k and Roth max instead of finishing 401k max.

Our taxes are tiered, as in the first x amount of dollars are taxed at a lower rate, the next x above a threshhold at a higher rate, etc.

If you have exactly the same income in retirement aren't you getting much of it taxed at a lower tier rates (or not at all because of deduction) when it would have all been taxed at your highest bracket during your working years if you just dropped it into savings post tax?

 

[WRBT]

Also on Roth - isn't it true that if (heaven forbid) you really needed the cash you can take out your contributions no penalty and no taxes.

 

[Indexter]

Google this: Roth Calculator

 

[Nords]

why does anyone think most people will be in a higher bracket not working than working? i have a problem believing that...with the baby boomers now being a major part of the population i cant imagine any politcal leader or group telling the baby boomers that they are raising their tax brackets...oh the social security taxes and medicare taxes may go up big time but i cant see tax rates.also look at how the brackets are raised every year.

It's ironic that your poster name is "mathjak". It doesn't matter what you or anyone else thinks or believes-- it's all about the math. Opinions & forecasts are easy. Math is hard, and if you don't do it then analysis is impossible.

Everyone has to stop looking over everyone else's shoulders and do their own math. For example, some people get pensions when they're not working, but not until a certain starting age. In our case, even if the tax brackets continue their current policy of CPI indexing and the rates don't change, when spouse's pension starts then we'll be in a higher tax bracket. That tax bracket may even shoot up again when we have to start taking RMDs. We'll also be paying taxes on our Social Security distributions whether or not we delay taking them.

So we've started converting our IRAs to Roths now-- when we have nearly zero earned income, a huge mortgage-interest deduction, and a bit of room to the top of the 15% tax bracket. Other side benefits include paying the taxes out of taxable cap gains (effectively boosting the size of the Roth by not taking the conversion taxes out of it), taking SS when we want to instead of when the tax impact will be lowest, and not having to deal with RMD calculations. I can put numbers on a spreadsheet and conclude that a Roth conversion is a good deal, no matter how much I think or believe.

I don't like paying taxes before they're due, but I don't mind paying some now if there's a reasonable possibility that I can avoid paying more later. Will taxes be raised over the next few years? That may be possible, and it's certainly more likely than taxes being reduced (or even staying the same) for the rest of my life. Could Congress change the entire tax code or mess with tax-free withdrawals of Roth IRAs? Sure, but I don't think it's likely enough to make me feel good about staying with conventional IRAs. No matter how hard I think or believe I don't expect my efforts to have a measurable effect on Congressional gridlock or the vested interests in the current tax code.

Ironically we'll probably skip a Roth conversion in 2009 and make our unearned income look as pitiful as possible. The goal will be to turn in a world-class FAFSA for our kid's college scholarship applications. I can do the math on that one, too, without having to think or believe, and you won't find that issue covered by a conversion calcuator.

Also on Roth - isn't it true that if (heaven forbid) you really needed the cash you can take out your contributions no penalty and no taxes.

Yes.

 

[FlowGirl]

Roth's usually win the Roth vs traditional battle.   But against a TSP, its a much harder choice as to which to max first per what i said above.

Yup. Our priority is to max out TSP first because its cheap and easy, although usually we can afford to do both TSP and Roth. Another advantage with an IRA is that you have until April of the next year to make the contribution, whereas you're stuck with funding TSP strictly out of paychecks before the end of the year. There were several years where things were tight and those few extra months meant the difference between us funding our IRAs or not funding them at all. Doing TSP first gave us more flexibility and allowed us to maxmize our overall retirement contributions.

 

[mathjak107]

i think the statistics are about 90% of retired americans are below a retirement income of 81,000 a year with the median around 65,000 for the baby boomers ..with 81,000 the upper limit for the 15% tax bracket before the 20,000 or so in deductions for a couple over 65 and thats this year.on average the 15% bracket gets raised 1500-2000 every year...yes for some a roth makes sense but for most americans its not the best deal...aside from the fact let most americans have easy access to their retirement funds and they will be spent by retirement..i would never want to pay a dollar of tax more today to possibly save a dollar in the future.
whats nice too about pulling out the 35,000 a year from your retirement money at 1500.00 in taxes is if you reinvest it in your taxable account the capital gains rate at least as it is now is 5% if your in the 15% bracket and thats scheduled to go to zero..cant beat that deal for most americans

 

[ferco]

Are you limited by how much you can transfer from a IRA to a Roth in any given year? Do you have to have income in that particular year to do the transfer? For example, if my earned income is 15k annual, can I transfer 20k per year from my old trad IRA to a Roth in that year? Another twist, can I also contibute (new money)to the Roth based on my 15k income for the year?

 

[REWahoo]

ferco, check out http://www.fairmark.com/rothira/index.htm for answers to your ROTH questions.

 

[Nords]

Are you limited by how much you can transfer from a IRA to a Roth in any given year? Do you have to have income in that particular year to do the transfer? For example, if my earned income is 15k annual, can I transfer 20k per year from my old trad IRA to a Roth in that year? Another twist, can I also contibute (new money)to the Roth based on my 15k income for the year?

No, no, yes, and yes.

But as REW says, go read the Fairmark website. Also read Ed Slott's books and ask your really abstruse & detailed questions on his discussion board. There's no simple one-size-fits-all answers on this subject.

 

[BunsGettingFirm]

I briefly scanned the fairmark site, but I didn't see anything about rolling over the after-tax portion of a roll-over IRA to a Roth IRA. I have some after-tax money that was rolled from a 401(k) to a roll-over IRA, and it hasn't been 60 days since I left my last job, can I roll the after-tax dollars to a Roth?

Modification:

I just got off the phone with a Fidelity representative, and she said that once the after-tax dollars have been rolled over to a roll-over IRA, it is not possible to separate the pre- and after-tax dollars. That is, if I were to convert any amount, the pre- and after-tax dollars will be withdrawn proportionately from my roll-over IRA. If my after-tax dollars are only 7% of my roll-over IRA, then 93% of the conversion will come from pre-tax dollars, so the situation ends up very much like a regular conversion.

I still think this year and next year will be a good time to convert because I'm a student, and my income is going to be low. It's better than trying to convert while pulling in a regular salary.

Of course, the whole logic of converting to a Roth is based on 1) that taxes will likely be higher in the future and 2) that Roth offers more flexibility than a traditional IRA or a 401(k) making Roth a valuable tool for ER.

 

[mathjak107]

where are you getting after tax money in a 401k rollover?

 

[Bimmerbill]

My old employer let us put after tax dollars into their 401K. I hit the max for, um.. 2001?, and the remainder of my contributions were still allowed into the 401K as after tax. Was only $600 or so.

 

[Gumby]

Why would you want to put after tax money in a 401k?  Wouldn't you have more investment options and less problem cashing out if you just invested it on your own?

I guess if you had exactly the investments you wanted in the 401k and the fees were substantially lower than you could get on your own, it might make sense, but otherwise, I just can't see it.

 

[Nords]

I briefly scanned the fairmark site, but I didn't see anything about rolling over the after-tax portion of a roll-over IRA to a Roth IRA. I have some after-tax money that was rolled from a 401(k) to a roll-over IRA, and it hasn't been 60 days since I left my last job, can I roll the after-tax dollars to a Roth?

Hey, it could be worse. Very few 401(k) owners realize that they have to track the various categories of contributions (employer, employee before-tax, employee after-tax) in their 401(k)s in order to properly calculate an RMD years down the road. If you roll over that 401(k) into your existing IRA then you've added deductible (& possibly non-deductible) contributions to the stew. If you don't know the basis of all these categories then the tax software assumes the highest tax/worst-case scenario.

But you've already learned the answer. You have to roll the 401(k) into a conventional IRA and then convert that conventional IRA to a Roth. Ed Slott even suggests that you go so far as to put EACH CATEGORY of your 401(k) contributions (and their proportional gains) into separate conventional IRA accounts to "simplify" the cost-basis tracking as you pick your way through the conversions.

Ed's approach seems a little extreme to me, especially if you're not planning to have to deal with RMDs. Form 8606 tracks the basis of a conventional IRA and plugs through the process of converting to a Roth. You don't have to be a CPA or a math genius to think through the process, you just have to be able to follow the directions (or to let TurboTax do it for you).

I guess if you had exactly the investments you wanted in the 401k and the fees were substantially lower than you could get on your own, it might make sense...

Exactly. I don't know if you were around when the TSP was finally offered to the military, but we'd all love to be able to make our own after-tax contributions to gargantuan index funds with extremely low turnover and expense ratios of 5-7 basis points.