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10-06-2007, 08:18 AM
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#21
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Quote:
Originally Posted by Telly
I have done this. Sent letter authorizing X $ to be transferred from fund Y of IRA to fund Y of Roth. Same mutual fund, just different account, so it's a simple transfer not affected by market movements. I also specified that no money was to be withheld for taxes due, otherwise, they will automatically withhold for IRS. I paid tax out of current money after the tax year.
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Telly did this right. You certainly should NOT want the taxes paid out of the IRA conversion. The taxes should be paid from some source of funds OUTSIDE the IRA (and other tax-deferred accounts). Why pay income taxes on income taxes?
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10-06-2007, 01:12 PM
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#22
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
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Quote:
Originally Posted by LOL!
Telly did this right. You certainly should NOT want the taxes paid out of the IRA conversion. The taxes should be paid from some source of funds OUTSIDE the IRA (and other tax-deferred accounts). Why pay income taxes on income taxes?
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If taxes are paid out of the IRA conversion money and the owner is younger than 59.5 then there'd also be a penalty for early withdrawal.
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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
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10-08-2007, 10:14 PM
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#23
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Thinks s/he gets paid by the post
Join Date: Mar 2007
Posts: 1,854
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Quote:
Originally Posted by FinanceGeek
I don't understand the rationale for an income limit on Roth IRA conversions. The more income a taxpayer has the higher the marginal rate they'd pay on the conversion (and frankly, the less attractive to the taxpayer the whole idea of converting really is) so why not permit it? Don't we have an insane need for additional tax revenue?
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Yes, but they get a tax benefit in the long run...and they are trying to avoid giving tax breaks to the wealthy. They get tax free GROWTH, which can be substantial over long periods.
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10-08-2007, 11:24 PM
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#24
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,202
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Quote:
Originally Posted by Finance Dave
Yes, but they get a tax benefit in the long run...and they are trying to avoid giving tax breaks to the wealthy. They get tax free GROWTH, which can be substantial over long periods.
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Show me the math for that tax benefit, assuming that you'll be in the same tax bracket (and I think it's much more likely you'll be in a higher bracket when you do the Roth conversion, which makes it worse), and taking into account the lost investment power of the money you paid in taxes when you did the Roth conversion. I don't believe it exists.
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10-09-2007, 07:26 AM
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#25
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
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I think a $100K AGI limit locks out a lot of dual-income professionals who otherwise might be able to do a Roth conversion. But you're right-- I don't understand the logic in making it difficult for people to pay taxes.
Quote:
Originally Posted by RunningBum
Show me the math for that tax benefit, assuming that you'll be in the same tax bracket (and I think it's much more likely you'll be in a higher bracket when you do the Roth conversion, which makes it worse), and taking into account the lost investment power of the money you paid in taxes when you did the Roth conversion. I don't believe it exists.
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Well, everyone has to do the math for their particular situation, and we'll be in a higher bracket when RMDs would be required. We're in the 15% income-tax bracket now and converting a bit of a Roth IRA each year to the top of that bracket. When spouse's pension kicks in we'll be in the 25% bracket.
Many cynical taxpayers think we'll never see rates as low as what we'll be seeing in 2008-2010. The idea is to convert now before income-tax rates are boosted to pay for... whatever.
Many ERs have a "Roth conversion window" between leaving the workplace and the start of a pension (or being able to make IRA/401(k) distributions). You may be solidly in the 25% bracket when you're working but ER may drop you to the 15% bracket (or possibly even the 10% bracket). Then when pensions/distributions kick in you may be back up in the 25% bracket.
Even if people are in the same bracket, whatever that bracket may be, RMDs may force lower-income retirees to have an AGI big enough to subject a chunk of their Social Security to income tax. Converting to a Roth would let them keep more.
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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
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10-09-2007, 09:20 AM
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#26
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,202
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Thanks Nords, those make sense and some may even apply to me, but certainly not while I'm still working unless income tax rates really soar in the future. I hadn't really considered the ER window. The social security factor is interesting too.
Tax rates may go up, but some people converted back when they were higher so you never know for sure.
One flaw I've been making in my math is thinking that you would reduce your Roth IRA by the amount taxed, so that you had less money in tax free growth. As you and others have pointed out, to avoid the early withdrawal tax you need to pay the taxes outside of the conversion. So what you are reducing is your investment in a taxable account. Had you not converted, any investment return on this money would've been taxed, and that makes for a benefit to a Roth IRA even if you stay in the same bracket. I'm going to mull that over again but I think that's right.
So yeah, it might make sense for me to start a slow conversion to the top of my bracket once I'm ER'd. I doubt there's many cases where a bulk conversion makes sense if it's very big.
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10-10-2007, 03:00 AM
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#27
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2005
Posts: 6,115
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you dont get taxed 2x on 401k loans. the money you earn is taxed 1x regardless of whether you take a 401k loan or a loan from a bank. if you took 10,000 from a 401k loan and decided you didnt need the money and put it right back are you paying more in taxes that year? of course not.
your income gets taxed the same in both cases. she likes to say your replacing the money with after tax money but thats inome that will be taxed regardless of the loan or not. think about it, at no time in any year either when withdrawing at retirement or while working and paying back the loan is your tax bill a penny higher at any point
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10-10-2007, 07:48 AM
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#28
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2006
Posts: 12,483
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Don't take Suze too seriously, all she wants to do is sell books and tapes..........
Read some stuff about her. As a young broker, she used to consult "crystals" to get advice about how to invest her client's monies...........
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Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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10-10-2007, 07:50 AM
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#29
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 14,183
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Were those crystals "snorted" by chance?
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Have Funds, Will Retire
...not doing anything of true substance...
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10-10-2007, 08:13 AM
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#30
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2006
Posts: 12,483
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__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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10-10-2007, 11:15 AM
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#31
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Recycles dryer sheets
Join Date: Aug 2007
Location: Midwest
Posts: 109
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Some of the discussion in this thread gives me the impression that you have to convert all of your tax-deferred savings all at once. Not the case. I did a conversion last year. First I created a rollover IRA at Vanguard and distributed part of my 401(k) funds to fund it via direct rollover. Then I converted part of my rollover IRA to my Roth IRA. Of course it increased my 2006 taxes, but I had planned for that by increasing my withholdings.
If you're planning to convert some of your money to Roth, I'd start this year and spread it out to your advantage. I think it quite probable that tax rates will go up in the future.
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