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Started By
Message
Here is an idea I think I’m going to think about
Posted on 12/5/08 at 11:11 am
Posted on 12/5/08 at 11:11 am
Part of my retirement strategy is to have both Traditional IRAs and Roth IRAs. As has been discussed several times on this board, no one knows what the tax rates will be when we retire so you can’t be sure of which is best for you. I believe that by having both traditional and Roth IRAs I will be able, at least to a limited extent, to withdraw from my IRAs with an eye on my marginal tax bracket. I had mentioned this months ago in another thread.
But, back to the idea I heard about – now might be a good time to convert some of your traditional IRA money into a Roth IRA. My wife and I opened IRAs before Roth IRAs existed. When Roth IRAs came to be we stopped contributing to traditional IRAs and began contributing as much as we could to the Roths. The first year that Roths were allowed I converted some traditional into Roths. That first year they let us spread the taxes we had to pay over the next (I believe) 4 years. I couldn’t convert them all because even with the 4 year allowance I couldn’t afford to pay the taxes.
I still have some of those early traditional IRAs that contain equity mutual funds such as Vanguard Index 500. As we all know they have taken a BIG hit, down 40 to 50% YTD. This means if you convert now while it is worth less, the tax bite will be smaller. Of course, you should only do this if you feel the market will come back before you retire and you can afford to pay the taxes. Speaking of paying the taxes – that is why I won’t consider converting until after the first of the year. That way I won’t have to pay the taxes on the conversion until April 2010.
I hadn’t thought of this until I heard someone mention it on a television show. It may be worth considering.
But, back to the idea I heard about – now might be a good time to convert some of your traditional IRA money into a Roth IRA. My wife and I opened IRAs before Roth IRAs existed. When Roth IRAs came to be we stopped contributing to traditional IRAs and began contributing as much as we could to the Roths. The first year that Roths were allowed I converted some traditional into Roths. That first year they let us spread the taxes we had to pay over the next (I believe) 4 years. I couldn’t convert them all because even with the 4 year allowance I couldn’t afford to pay the taxes.
I still have some of those early traditional IRAs that contain equity mutual funds such as Vanguard Index 500. As we all know they have taken a BIG hit, down 40 to 50% YTD. This means if you convert now while it is worth less, the tax bite will be smaller. Of course, you should only do this if you feel the market will come back before you retire and you can afford to pay the taxes. Speaking of paying the taxes – that is why I won’t consider converting until after the first of the year. That way I won’t have to pay the taxes on the conversion until April 2010.
I hadn’t thought of this until I heard someone mention it on a television show. It may be worth considering.
2
Posted on 12/5/08 at 11:16 am to PlanoPrivateer
I think all bets are off if Roth will retain their tax free status on disbursement.
while washington doesn't give a flying frick about the federal deficit, at some point they will, and I think taxing withdrawals from Roth will be too tempting for policy makers to not address.
while washington doesn't give a flying frick about the federal deficit, at some point they will, and I think taxing withdrawals from Roth will be too tempting for policy makers to not address.
Posted on 12/5/08 at 11:25 am to MileHigh
quote:I agree 100% It will start by taxing only "high net worth" individuals -- why should these rich frickers get tax breaks that were designed for the working man?
at some point they will, and I think taxing withdrawals from Roth will be too tempting for policy makers to not address.
Then "high net worth" will slowly be redefined to its minimum politically acceptable level. I'd guess top 25% or so.
Posted on 12/5/08 at 11:28 am to Cold Cous Cous
quote:
I agree 100% It will start by taxing only "high net worth" individuals -- why should these rich frickers get tax breaks that were designed for the working man?
Then "high net worth" will slowly be redefined to its minimum politically acceptable level. I'd guess top 25% or so.
exactly. Let's take from the financially prudent to reward the dumbasses.
Posted on 12/6/08 at 11:58 am to MileHigh
So if I am wrong, say so and correct me, I don't have a roth yet.
Don't you pay taxes up front with a Roth IRA and when you start taking out it is tax free, because you already paid a tax on it. So how can these idiot want to tax the money AGAIN when it comes out? I don't mind paying a tax once, but twice really ticks me off.
Don't you pay taxes up front with a Roth IRA and when you start taking out it is tax free, because you already paid a tax on it. So how can these idiot want to tax the money AGAIN when it comes out? I don't mind paying a tax once, but twice really ticks me off.
Posted on 12/6/08 at 12:33 pm to PlanoPrivateer
Yeah, I've been thinking about this with my 401(k) since I already have a Roth. My employer offers a Roth 401.
Posted on 12/6/08 at 5:18 pm to MileHigh
MileHigh, "I think all bets are off if Roth will retain their tax free status on disbursement."
MileHigh, I agree with you in that you just don't know what the government will do down the road. Not only could they do away with Roths they could do away with IRAs, 401 Ks, or captial gains tax rates. I think it much more likely that they will do away with future Roths then they will tax current ones. I feel like you just have to play the cards you are dealt and right now Roths are there for us to use.
MileHigh, I agree with you in that you just don't know what the government will do down the road. Not only could they do away with Roths they could do away with IRAs, 401 Ks, or captial gains tax rates. I think it much more likely that they will do away with future Roths then they will tax current ones. I feel like you just have to play the cards you are dealt and right now Roths are there for us to use.
Posted on 12/6/08 at 6:13 pm to PlanoPrivateer
The way I see it, take the tax advantage NOW vs later because of one simple fact.
Democrats will ALWAYS and WITHOUT FAIL demonize you when you have money.
So, if you manage to do very well with your retirement, you should at least consider it an even bet that future tax advantages may be taken away from you.
I can almost hear it now. "We're just gonna tax these huge portfolios to help........blah blah blah".
For historical reference, check Tax Free Munis and just look at the liberal rhetoric on 401Ks now.
Democrats will ALWAYS and WITHOUT FAIL demonize you when you have money.
So, if you manage to do very well with your retirement, you should at least consider it an even bet that future tax advantages may be taken away from you.
I can almost hear it now. "We're just gonna tax these huge portfolios to help........blah blah blah".
For historical reference, check Tax Free Munis and just look at the liberal rhetoric on 401Ks now.
Posted on 12/6/08 at 10:19 pm to PlanoPrivateer
quote:
I feel like you just have to play the cards you are dealt and right now Roths are there for us to use.
I know what you mean, but I am going to be putting money into traditional iras this year for the wife, not roth.
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