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05-19-2014, 07:20 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: Mar 2011
Posts: 8,418
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Quote:
Originally Posted by brewer12345
I will save six figures easily by jumping into this so-called "trap."
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+1. I will also easily save six figures. If I have to pay a bit more in taxes at withdrawal time, that's a deal I'll take.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
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05-19-2014, 07:21 AM
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#22
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Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Mississippi
Posts: 1,894
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Quote:
Originally Posted by ajs56
But I don't see the value of converting to Roth in my situation, unless I am missing something?
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I could see it being a trap... being caught in something you weren't expecting with no easy way out. But it's not the worst problem to have. I was in a high bracket when working, currently in 15%, and will be in 25% by 70. I don't see any way to avoid that short of not taking SS and pension income.
The roth conversion gives you a tax free income source as opposed to tax deferred. So if rates go up in the future the roth is exempt from that ( assuming they don't change the rules )
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05-19-2014, 07:43 AM
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#23
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by rbmrtn
I could see it being a trap... being caught in something you weren't expecting with no easy way out. ...
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We should have been expecting it if we were paying attention since it was pretty obvious.
While we were saving tax-deferred while working it was easy to overlook that when we withdraw that the piper would need to be paid. Out of sight, out of mind and a long ways down the road.
It is very unlikely that I will come out poorly (marginal rates during withdrawal are higher than when i was working) and highly likely that I will come out ahead (marginal rates lower when withdrawn than when contributed) so I still think it was a good thing for me to do ---- but I still wish I didn't have to pay the piper at all!!
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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05-19-2014, 07:46 AM
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#24
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Thinks s/he gets paid by the post
Join Date: Jun 2013
Posts: 2,522
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One way to look at this is investing in Pretax accounts is a partnership with the government. Uncle Sam owns a portion of your account-did from the day you deposited funds and avoided paying taxes. The government is patiently waiting to cash in on its investment and may collect nothing from the taxpayer who is in the 0 percent tax bracket or a bonanza from the taxpayer who is in a high tax bracket at the time of withdrawal. It therefore behooves the taxpayer to manage withdrawals via conversions if necessary, so as to lessen the governments partnership.
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05-19-2014, 08:03 AM
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#25
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Quote:
Originally Posted by ajs56
So... the main change in the event of one of us passing with respect to this discussion is the switch from MFJ tax tables to single tax tables, correct?
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Yes, in your case the biggest change would probably be the tax tables. Also, taking one personal exemption rather than two will mean a further increase in taxable income of $3,950, and if you are taking the standard deduction (rather than itemizing) the change from MFJ to single will mean the loss of $6200 in deductions (all figures for 2014).
For couples who are now in the 15% bracket and the survivor is pushed into the 25% bracket, the increase in taxes can be dramatic (increased tax rate, decreased deductions, loss of 0% CG and dividend treatment.).
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05-19-2014, 08:11 AM
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#26
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Thinks s/he gets paid by the post
Join Date: Feb 2011
Posts: 1,797
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Quote:
Originally Posted by samclem
Yes, in your case the biggest change would probably be the tax tables. Also, taking one personal exemption rather than two will mean a further increase in taxable income of $3,950, and if you are taking the standard deduction (rather than itemizing) the change from MFJ to single will mean the loss of $6200 in deductions (all figures for 2014).
For couples who are now in the 15% bracket and the survivor is pushed into the 25% bracket, the increase in taxes can be dramatic (increased tax rate, decreased deductions, loss of 0% CG and dividend treatment.).
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And there's the very real potential that those rates will increase in coming years to service the massive Fed debt- especially when current low interest rates rise back towards historical norms.
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05-19-2014, 10:55 AM
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#27
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Recycles dryer sheets
Join Date: Apr 2006
Posts: 150
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Quote:
Originally Posted by samclem
Yes, in your case the biggest change would probably be the tax tables. Also, taking one personal exemption rather than two will mean a further increase in taxable income of $3,950, and if you are taking the standard deduction (rather than itemizing) the change from MFJ to single will mean the loss of $6200 in deductions (all figures for 2014).
For couples who are now in the 15% bracket and the survivor is pushed into the 25% bracket, the increase in taxes can be dramatic (increased tax rate, decreased deductions, loss of 0% CG and dividend treatment.).
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Thanks again. I need to do some projections with more focus on tax bracket implications. Rough idea in my head right now is saying our tax bracket will stay the same over the long haul for the most part, but I will look at what might happen to that if one of us passes.
Thanks for sharing your thoughts on this.
__________________
Best!
-AJ
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05-19-2014, 11:03 AM
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#28
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Recycles dryer sheets
Join Date: Apr 2006
Posts: 150
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Quote:
Originally Posted by pb4uski
We should have been expecting it if we were paying attention since it was pretty obvious.
While we were saving tax-deferred while working it was easy to overlook that when we withdraw that the piper would need to be paid. Out of sight, out of mind and a long ways down the road.
It is very unlikely that I will come out poorly (marginal rates during withdrawal are higher than when i was working) and highly likely that I will come out ahead (marginal rates lower when withdrawn than when contributed) so I still think it was a good thing for me to do ---- but I still wish I didn't have to pay the piper at all!!
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This is pretty much how I see it also. I am going to consider the possible tax implications of one spouse passing early, and whether that might make roth conversions attractive. But I'm not seeing much other reason to even consider the conversions. As you say, at some point the piper must be paid, though let's pay him as little as possible...
__________________
Best!
-AJ
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05-19-2014, 12:20 PM
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#29
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Dryer sheet aficionado
Join Date: Dec 2013
Posts: 30
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Its a concern for me as well, as my company matches 100% up to 15% of my pay. I expect to have close to 1.7 million in my 401k when I retire in 18 years.
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05-19-2014, 03:12 PM
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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: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Wow!!! 100% on 15%? That is a great deal. I've never heard of such a rich deal.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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05-19-2014, 03:20 PM
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#31
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2012
Posts: 6,180
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Why do some consider this a "trap"? It is not like one didn't know that taxes would be due on this later. I went into it knowing full well that taxes would be paid later. I have no problem being taxed at the 15% bracket (particularly with the added appreciation via 401K company match and the last 30 years of the market), as the salary deferral kept us out of brackets greater than 25%.
__________________
FIREd date: June 26, 2018 - "This Happy Feeling, Going Round and Round!" (GQ)
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05-19-2014, 03:31 PM
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#32
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Moderator
Join Date: Apr 2012
Location: San Diego
Posts: 14,212
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Quote:
Originally Posted by travelover
Something tells me that the OP has a product to sell that is a "solution" to this problem.
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I don't know about that - but several of LongPrime's posts have shown him to have a different view than the majority here. This thread is just another example.
Like anything on the internet - it's good to hear both sides of an argument, filter out the garbage and misinformation, and make up your own mind. I don't think LongPrime is going to change many opinions... but if what he says is working for him... so be it.
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05-19-2014, 03:35 PM
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#33
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Thinks s/he gets paid by the post
Join Date: Jan 2008
Posts: 1,495
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Quote:
Originally Posted by ERhoosier
And there's the very real potential that those rates will increase in coming years to service the massive Fed debt- especially when current low interest rates rise back towards historical norms.
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+1
Bernstein, among others, has said as much. Big issue for those of us delaying to SS is the interplay with RMD's. However, I plan to Roth convert for a few years to beat future tax increases as much as to avoid the tax torpedo at 70.
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05-19-2014, 03:50 PM
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#34
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,902
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I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!
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05-19-2014, 03:52 PM
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#35
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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Quote:
Originally Posted by GrayHare
I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!
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Enough to want to change the spelling of your last name, eh?
__________________
Numbers is hard
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05-19-2014, 04:23 PM
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#36
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,902
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I doubt that'll work, I think a time travel machine is needed.
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05-19-2014, 04:28 PM
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#37
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by GrayHare
I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!
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True.... but the 15% ordinary marginal rate that will apply to much of mine withdrawals is the same or lower than capital gain tax rates while I was working so even at ordinary rates I am still ahead of having not deferred, paid the taxes and invested in taxable accounts.
Federal Capital Gains Tax Rates, 1988-2013 | Tax Foundation
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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05-19-2014, 04:32 PM
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#38
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gone traveling
Join Date: May 2014
Posts: 153
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05-19-2014, 05:14 PM
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#39
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Thinks s/he gets paid by the post
Join Date: Nov 2013
Location: Bay Area
Posts: 2,745
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Quote:
Originally Posted by GrayHare
Uncle Sam says, "You can pay me now, or you can pay me later."
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What trap? In my case, it's "later" at much lower tax rate.
But then again, I am sure there are some (maybe, one or two) among us who want to pay as much tax as they can in order to help US government's budget problem. Anyone?
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05-24-2014, 10:25 AM
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#40
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Dryer sheet wannabe
Join Date: May 2014
Posts: 24
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Money I can't touch for 30 years, in a government created account structure? I would be stupid not to consider this a trap. Wanting to retire much earlier than I can touch the money, my goal for deferred retirement has been moderation. Save enough outside of retirement accounts and hopefully be able to pull from tax deferred at the lowest tax rate (hopefully that rate is still low). However, in the meantime if I do have years of lower income I do plan to covert to roth as much as possible.
One thing I highly regret is not contributing to a roth when my income was lower, I would love to have a little bit of tax free money that I could invest aggressively while I am still young.
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