Let's rip on Suze!

[Payin-the-Toll]

Watched Suze Orman on Larry King last night. She said something about being able to convert a traditional IRA to a Roth IRA in 2010. Anybody know anything about this? Can you do it without paying taxes, etc.? They also showed an old blurb of hers about if you put away $100 a month from age 25 to 65 and got normal market returns, at age 65 you would have $1 million. I'm not good at that calculator stuff but am sceptical of these numbers. She also harped about not taking loans out of a 401K (which I totally agree with), but she said you get taxed twice. I've seen this heavily debated on other forums, and a lot of people say it's not true. Any responses on our favorite 'GirlFriend'?

 

[W2R]

Watched Suze Orman on Larry King last night. She said something about being able to convert a traditional IRA to a Roth IRA in 2010. Anybody know anything about this? Can you do it without paying taxes, etc.?

I don't see how you could get out of paying taxes on it. Rumor has it that we will be able to convert our TSP directly to a Roth IRA by 2010, instead of just to a non-Roth IRA. Maybe that is what she was talking about. (?) Here's a link: Converting to a Roth IRA better in 2010

They also showed an old blurb of hers about if you put away $100 a month from age 25 to 65 and got normal market returns, at age 65 you would have $1 million. I'm not good at that calculator stuff but am sceptical of these numbers. She also harped about not taking loans out of a 401K (which I totally agree with), but she said you get taxed twice. I've seen this heavily debated on other forums, and a lot of people say it's not true. Any responses on our favorite 'GirlFriend'?

If the $100/month is increased by 3%/year for inflation, you could get that much in 40 yrs. That would be a million dollars in 2047 dollars, not 2007 dollars.

OK, I admit it - -I really LIKE Suze's show, though I retain a skeptical eye.

 

[Gumby]

I believe what she may have been talking about is the income limit on the ability to convert. As I understand the law, if your Adjusted Gross Income exceeds $100k per year, you cannot currently convert from a regular to a Roth IRA. However, in 2010, for one year, this income limit will not apply and anyone can convert. At the time of conversion, you must pay income tax at the regular rate on the the taxable withdrawals (i.e. - the amount of the IRA minus any basis, if you made non-deductible contributions). If you pay the tax with other funds, this has the effect of automatically increasing your Roth IRA, which from that point on is not taxable.

 

[bots2019]

She said something about being able to convert a traditional IRA to a Roth IRA in 2010. Anybody know anything about this?

Currently there's an income limit (100k) to convert Trad IRA to Roth. If nothing changes before 2010 higher wage earners will be eligible to convert - but will still owe taxes on the amount converted.

They also showed an old blurb of hers about if you put away $100 a month from age 25 to 65 and got normal market returns, at age 65 you would have $1 million.

By my calculations you'd need to return 12.1% (after tax) to get to $1M in 480 months @ 100/month contribution rate. And, of course those will be in future (less valuable) dollars.

 

[ziggy29]

Watched Suze Orman on Larry King last night. She said something about being able to convert a traditional IRA to a Roth IRA in 2010. Anybody know anything about this? Can you do it without paying taxes, etc.? They also showed an old blurb of hers about if you put away $100 a month from age 25 to 65 and got normal market returns, at age 65 you would have $1 million. I'm not good at that calculator stuff but am sceptical of these numbers. She also harped about not taking loans out of a 401K (which I totally agree with), but she said you get taxed twice. I've seen this heavily debated on other forums, and a lot of people say it's not true. Any responses on our favorite 'GirlFriend'?

First of all, yes, unless it's repealed by a new Congress and new President in 2009, right now anyone can perform a Roth conversion in 2010 regardless of income that year. It would not avoid taxes, though.

As far as the getting taxed twice on the 401K loan balance, in *some* sense you do because you pay back pre-tax borrowing with after-tax dollars. Let's say you borrow $10,000 from your 401K. After a couple years you've paid back the loan plus $1,000 in interest. This $11,000 in after-tax payments is taxed again when you withdraw it. Some wouldn't consider the $10K principal as being "doubly taxed" but the interest paid definitely is.

 

[bots2019]

Here's a bit more detail (and Suze's take) for those interested...

http://finance.yahoo.com/expert/article/moneymatters/5160

 

[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?

 

[mickeyd]

I don't understand the rationale for an income limit on Roth IRA conversions.

The wisdom of Congress.

 

[lucija]

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?

By the way, how to you use quotes?

The ROTH conversion in 2010 is of interest only to folks with high taxable income and no other traditional IRA.

For example, say that you're a lucky person making $250K/yr with all of your tax advantaged funds in your 401(k) - you cannot contribute to a ROTH. Incidentally, you also cannot convert any IRA assets (in this example you have none). What you can do is contribute to a non-deductable TIRA for 2007, 2008, 2009 and 2010 and then in 2010 convert the whole lot to ROTH. Yes, you will have to pay tax on the gain, but how much will that be? Maybe $200.

Also, it can be useful if you're in 25% fed tax bracket, but over 100K conversion limit and have a small TIRA already. Then you can do as above, but also convert original TIRA as well. The tax bite can be spread over 2 tax years.

So, who will not benefit from this? Folks with under 100K AGI or anyone with a large TIRA already in place. Keep in mind that in 2010 (no income limit is imposed on ROTH conversions) but you can't pick which IRA to convert (i.e., all of the IRA accounts are considered when converting - you can't say "I only want to converts $15K from this non-deductable TIRA and leave the rest "as is").

 

[donheff]

By the way, how to you use quotes?

After you click the quote button make sure your retain the square bracket quote=name;number close bracket in front of the text you want in quotes and keep the square bracket/quote close bracket at the end of the text. If you are not clicking quote just type the quote brackets and type the text you want in quotes between them. The square bracket characters are above the enter key on the same keys as these: {}

 

[furpants]

As far as the getting taxed twice on the 401K loan balance, in *some* sense you do because you pay back pre-tax borrowing with after-tax dollars. Let's say you borrow $10,000 from your 401K. After a couple years you've paid back the loan plus $1,000 in interest. This $11,000 in after-tax payments is taxed again when you withdraw it. Some wouldn't consider the $10K principal as being "doubly taxed" but the interest paid definitely is.

Ziggy, you're correct that the interest paid is taxed twice. However, the principal is certainly not. Here's a quick example for both scenarios (pulled from a discussion I previously had about this on another board, lol). Hopefully the table will retain its formatting properly...



401k Double Taxation Myth

LOAN EXAMPLE
Action Taxes 401k Cash Other NW
$1000 to 401k 0 1000 0 0 1000
$1000 loan from 401k 0 0 1000 0 1000
$1000 buys asset 0 0 0 1000 1000
$1222 earned 122 0 1100 1000 2100
$1100 pays loan 0 1100 0 1000 2100
$1100 from 401k 110 0 990 1000 1990
total taxes paid 232

CASH EXAMPLE
Action Taxes 401k Cash Other NW
$1000 to 401k 0 1000 0 0 1000
$1222 earned 122 1000 1100 0 2100
$1000 buys asset 0 1000 100 1000 2100
$1000 from 401k 100 0 1000 1000 2000
total taxes paid 222

Ok, the formatting is poor, but hopefully you can get the idea, at least.

 

[Martha]

Ziggy, you're correct that the interest paid is taxed twice. However, the principal is certainly not. Here's a quick example for both scenarios (pulled from a discussion I previously had about this on another board, lol). Hopefully the table will retain its formatting properly...

LOAN EXAMPLEActionTaxes Paid401k BalanceCashOther AssetsNet Worth$1000 earned goes into 401k01000001000$1000 loan borrowed from 401k00100001000$1000 loan proceeds used to buy an asset00010001000$1222 earned1220110010002100$1100 used to pay off 401k loan balance01100010002100$1100 withdrawn from 401k at retirement110099010001990total taxes paid232CASH EXAMPLEActionTaxes Paid401k BalanceCashOther AssetsNet Worth$1000 earned goes into 401k01000001000$1222 earned1221000110002100$1000 cash used to buy an asset0100010010002100$1000 withdrawn from 401k at retirement1000100010002000total taxes paid222

Here is a thread that talks about 401k loans and the fact that only the interest is taxed twice. http://www.early-retirement.org/forums/f28/401k-loans-25800.html#post481709

 

[Buckeye]

I thought the conversion to Roth window was for 2 years or you got to spread the tax payments over two years. Something was available for 2 years.

 

[maxer]

Have a slightly different but relevant question:

Lets say I have no income but would like to convert part of the IRA to ROTH - thereby possibly staggering the conversion over two or more years - the idea being to take advantage of the lower (15%) Federal tax bracket. So the amount of coversion would be limited by the lower tax bracket taxable amount. Hope the question is clear.

Anybody see a problem with that?

 

[Moemg]

I thought the conversion to Roth window was for 2 years or you got to spread the tax payments over two years. Something was available for 2 years.

The conversion to Roth is only one year but you can spread the tax payments over two years .

 

[bots2019]

Have a slightly different but relevant question:

Lets say I have no income but would like to convert part of the IRA to ROTH - thereby possibly staggering the conversion over two or more years - the idea being to take advantage of the lower (15%) Federal tax bracket. So the amount of coversion would be limited by the lower tax bracket taxable amount. Hope the question is clear.

Anybody see a problem with that?

No problem. In fact this is a very viable strategy for early retirees.

 

[gindie]

The conversion to Roth is only one year but you can spread the tax payments over two years .

I'm pretty sure after reading much about the bill is that the $100K is eliminated for tax years 2010 and after.

For conversions done in 2010, the tax can be split and paid in tax years 2011 and 2012.

 

[maxer]

Thanks bots2019

No problem. In fact this is a very viable strategy for early retirees.

If I can extend on my previous question:

How would this work practically with a mutual fund family: Would the fund family handle the process and how can it be arranged so the taxes owed are paid from the IRA/Roth Coversion funds?

Again, I hope the question is clear and look forward to any comments

 

[Telly]

If I can extend on my previous question:

How would this work practically with a mutual fund family: Would the fund family handle the process and how can it be arranged so the taxes owed are paid from the IRA/Roth Coversion funds?

Again, I hope the question is clear and look forward to any comments

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.

 

[RunningBum]

Ziggy, you're correct that the interest paid is taxed twice. However, the principal is certainly not. Here's a quick example for both scenarios (pulled from a discussion I previously had about this on another board, lol). Hopefully the table will retain its formatting properly...



401k Double Taxation Myth

LOAN EXAMPLE
Action Taxes 401k Cash Other NW
$1000 to 401k 0 1000 0 0 1000
$1000 loan from 401k 0 0 1000 0 1000
$1000 buys asset 0 0 0 1000 1000
$1222 earned 122 0 1100 1000 2100
$1100 pays loan 0 1100 0 1000 2100
$1100 from 401k 110 0 990 1000 1990
total taxes paid 232

CASH EXAMPLE
Action Taxes 401k Cash Other NW
$1000 to 401k 0 1000 0 0 1000
$1222 earned 122 1000 1100 0 2100
$1000 buys asset 0 1000 100 1000 2100
$1000 from 401k 100 0 1000 1000 2000
total taxes paid 222

Ok, the formatting is poor, but hopefully you can get the idea, at least.

Also, in the cash example, the $1000 sitting in the 401K probably made money that it wouldn't have if it had been taken out for a loan. If it earns that same 10%, you have $1100, and pay $110 in taxes when you withdraw it, so you have the same total taxes paid. So while technically the interest IS double taxed, you were likely going to pay that tax anyway, with your 401k growing a different way than the loan interest repayment.

To me, the danger of taking a loan from your 401K is losing your job and not being able to pay it back. It may also indicate you aren't budgeting your income well, and it may be a strain to repay it. But, if the choices are to either:

- put $ in a 401K, run a very tight budget, and use the 401K as a safety net you can take a loan on if you must for an unexpected expense, or

- not put $ in a 401K because you need to build up an emergency fund

It seems like the first choice is better.

 

[LOL!]

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.

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?

 

[Nords]

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?

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.

 

[Finance Dave]

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?

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.

 

[RunningBum]

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.

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.

 

[Nords]

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.

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.

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.