Roth IRA Conversion: A Bad Bet?

[kaneohe]

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Originally Posted by GregLee Thanks to Kaneohe for these comprehensible case studies. There's another wrinkle that I have to consider -- probably doesn't affect very many of you. That is the impact of state income tax, which is also deferred for IRAs. While my federal tax will probably be about the same during retirement as it was when I worked, I think my Hawaii state income tax will go down from 7-8% to zero, since all my pension income will be exempt, and the standard deduction and exemptions will cover my modest income from investments. So, if I were to convert my wife's 160k TIRA today, I guess it would cost me 25% + 8%, but without conversion, withdrawals from the TIRA will only cost 25%.

Greg........that's an excellent YMMV point. I think I remember Nords mentioning what a great deal you HI retirees have w/ the pension & taxes.....just for my enlightenment, that pertains to state/federal pensions (have relatives w/ those), IRAs..........how about pensions from public corps? hmm......will have to keep that in mind and think about moving back someday.....does that apply if the public corp is not based there?

[kaneohe]

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Originally Posted by audreyh1 And you know what? Maybe that's what we'll do with our RMDs if it ever comes to that and our taxable income is high in our 70s - gift whatever is withdrawn from our TIRAs to charity. Audrey

Audrey.........just be aware that unless they extend the recent tax law allowing old folks to donate directly to charity w/o being taxed or unless you have other deductions (mortgage/state taxes/etc) that equal or exceed the standard deduction, you may be taxed on at least part of those RMDs even if you donate them to charity.

[Koolau]

Quote:

Originally Posted by GregLee Thanks to Kaneohe for these comprehensible case studies. There's another wrinkle that I have to consider -- probably doesn't affect very many of you. That is the impact of state income tax, which is also deferred for IRAs. While my federal tax will probably be about the same during retirement as it was when I worked, I think my Hawaii state income tax will go down from 7-8% to zero, since all my pension income will be exempt, and the standard deduction and exemptions will cover my modest income from investments. So, if I were to convert my wife's 160k TIRA today, I guess it would cost me 25% + 8%, but without conversion, withdrawals from the TIRA will only cost 25%.

GregLee, sorry if I missed the details, but I don't understand how you would take withdrawals from a TIRA without state tax in Hawaii. I've both converted TIRA money to ROTH and taken TIRA money "to spend" while living in HI and both were state-taxable events. Again, sorry if I missed the details someplace. I need to find out the details (hope I've paid HI TOO MUCH - I know I haven't paid too little.)

Thanks!

[GregLee]

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Originally Posted by kaneohe ... that pertains to state/federal pensions (have relatives w/ those), IRAs..........how about pensions from public corps?

The instructions for my 2009 Hawaii state income tax forms say: "Hawaii does not tax qualifying distributions from an employer-funded pension plan." And later:

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The following three types of distributions are not taxed by Hawaii ... (1) Pension or annuity distributions from a public (i.e. government) retirement system (e.g., federal civil service annuity, military pension, state or county retirement system). (2) Distributions from a private employer pension plan received upon retirement (including early retirement and disability retirement) if the employee did not contribute to the pension plan. (3) Distributions from a pension plan at 70-1/2 that are made to comply with the federal mandatory payout rule do qualify as a retirement payment whether or not the employee is still working full time. Distributions from a private employer pension plan received upon retirement are partially taxed by Hawaii if the employee contributed to the pension plan.

[GregLee]

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Originally Posted by Koolau ... I don't understand how you would take withdrawals from a TIRA without state tax in Hawaii. I've both converted TIRA money to ROTH and taken TIRA money "to spend" while living in HI and both were state-taxable events.

As I understand it (an important qualification), TIRA withdrawals (or conversions) are subject to Hawaii state income tax. But nonetheless, personally, I expect not to pay any state income tax on my TIRA withdrawals just because they will be the only income I have that is subject to state income tax, and their amounts will be small.

[kaneohe]

Greg/Koolau........thanks for clarifying about IRA. I misunderstood Greg also.
So.......if you had a 401K and took RMDs, no HI tax? .....but if you rolled it over to IRA, RMDs would be taxed by HI?

[Alan]

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Originally Posted by kaneohe Greg/Koolau........thanks for clarifying about IRA. I misunderstood Greg also. So.......if you had a 401K and took RMDs, no HI tax? .....but if you rolled it over to IRA, RMDs would be taxed by HI?

FYI - I believe RMD's cannot be rolled into an IRA.

[harley]

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Originally Posted by GregLee As I understand it (an important qualification), TIRA withdrawals (or conversions) are subject to Hawaii state income tax. But nonetheless, personally, I expect not to pay any state income tax on my TIRA withdrawals just because they will be the only income I have that is subject to state income tax, and their amounts will be small.

That sounds like a great bennie. My only concern would be whether the same situation would be in place come 70.5. I'm not sure how close you are, but I suspect a great exemption like that would be the first to fall to any budgetary shortfall. They could spin it as "not a tax increase, just closing a loophole".

Not to say that I wouldn't do the same as you're planning. It would be a wash if they get rid of the exemption, and you'd come out ahead if they don't. A win-not lose situation. Good luck.

[kaneohe]

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Originally Posted by Alan FYI - I believe RMD's cannot be rolled into an IRA.

Alan....you are of course correct. Sorry my poor writing misled you as to my real question. Take 2 below:

Greg/Koolau........thanks for clarifying about IRA. I misunderstood Greg also.
So.......if you had a 401K and took RMDs, no HI tax? .....but if you rolled the
401K into an IRA, RMDs would be taxed by HI?

[Koolau]

Quote:

Originally Posted by GregLee The instructions for my 2009 Hawaii state income tax forms say: "Hawaii does not tax qualifying distributions from an employer-funded pension plan." And later: Quote: The following three types of distributions are not taxed by Hawaii ... (1) Pension or annuity distributions from a public (i.e. government) retirement system (e.g., federal civil service annuity, military pension, state or county retirement system). (2) Distributions from a private employer pension plan received upon retirement (including early retirement and disability retirement) if the employee did not contribute to the pension plan. (3) Distributions from a pension plan at 70-1/2 that are made to comply with the federal mandatory payout rule do qualify as a retirement payment whether or not the employee is still working full time. Distributions from a private employer pension plan received upon retirement are partially taxed by Hawaii if the employee contributed to the pension plan. Yesterday 12:40 PM

Okay, I'm still enough confused that I'll get with my tax guy to be certain, but here is my SWAG. Look at "rule 3". Notice it still says from a "pension plan". So I think that would be if you took your pension as a lump sum and placed it in a qualified plan (e.g., TIRA). Notice too, that anything put in (even to a pension plan) by the employee is subject to HI tax.

Now, I DO think that when I take out my employer's match (in stock) I may not have to pay taxes on that portion of my 401(k) - but I'm not certain. To be honest, I have left it in my plan and taken other 401(k) funds in "hopes" that the stock will rebound. In any case, when the time comes in 7 years, I'll be certain the tax guy and I agree as to what we should do. In the mean time, I'll check to see if maybe I should rethink my ROTH conversions. I don't think so, but I will check. Thanks to all who have contributed, even though, collectively, we're not 100% certain.

Can you say "flat tax?!"

[GregLee]

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Originally Posted by Koolau Look at "rule 3". Notice it still says from a "pension plan". So I think that would be if you took your pension as a lump sum and placed it in a qualified plan (e.g., TIRA).

No, I don't think so. If you took a lump sum payment in place of a pension and put that into a TIRA, the TIRA would not be a qualifying pension plan, and withdrawals from it would be taxable. I didn't mean to imply previously that withdrawals from a TIRA would not be subject to Hawaii state income tax. They are subject to income tax. I just meant that for me, the amount of income from my TIRA would fall beneath the standard deduction and exemptions, so I would wind up not owing any income tax to the state. Or if not, at least I would be in a very low tax bracket.

[audreyh1]

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Originally Posted by kaneohe Audrey.........just be aware that unless they extend the recent tax law allowing old folks to donate directly to charity w/o being taxed or unless you have other deductions (mortgage/state taxes/etc) that equal or exceed the standard deduction, you may be taxed on at least part of those RMDs even if you donate them to charity.

That's true - that does kind of create a floor on charitable deductions.

And then there are those pesky income limits. It looks like this aspect has changed from several years ago. I remember a complete phase-out of charitable deductions above a certain income, but now it looks like it's just limited to 50% of AGI which is much more manageable.

Edited to add: Hmmm - I think those income limits are still there.

Audrey