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Gary

Posted: Thu Aug 28, 2008 1:04 pm

Guest

I'm facing a sticky problem. I've been a good saver all my life, and
as a result I have a great deal of money in traditional IRAs. I'm age
75 and as a result taking out RMDs on these IRAs. These RMDs push my
income (pension, dividends and social security) to well over $100,000,
causing me to spend more for medicare. And I assume in the future
there will be other income-based tests for entitlements. I'm further
concerned that taxes will be substantially higher in the future
(financing a war, etc.), making my situation even worse than it is now!

So I'm seriouisly considering converting all the IRA money (after he
RMD) to Roth IRA this year. I would have one big tax hit next April
(hopefully still at low tax rates) and considerable tax and entitlement
relief in future years. In addition I am considering converting
most-to-all of my regular investments to tax-frees.

The economic advantage or disadvantage of doing this depends very
heavily on the assumptions, especially the assumptions about tax rates
in future years. Those of you involved in financial planning: what are
you assuming about tax rates in the next 5-10 years?

Also, if you care to comment about this, what other assumptions do you
think are critical? And is there anything so stupid about this
conversion plan of mine that I have completely overlooked?

Thanks in advance for your comments.

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Douglas Johnson

Posted: Thu Aug 28, 2008 7:00 pm

Guest

Gary <gary_w1@hotmail.com> wrote:

Quote:

So I'm seriouisly considering converting all the IRA money (after he
RMD) to Roth IRA this year.

And is there anything so stupid about this
conversion plan of mine that I have completely overlooked?

The problem I see is that you are making a large bet on something that is
completely unpredictable. I mean we're talking about Congress here.

The usual recommendation around here is that you diversify your tax risks --
some money taxable, some IRA tax deferred, some Roth tax exempt. This way you
have some protection no matter what happens.

If you have strong feelings about future taxes, you could put more emphasis on
one type of account or another. But I wouldn't go "all in" on any of them.

-- Doug

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joetaxpayer

Posted: Thu Aug 28, 2008 7:00 pm

Guest

Gary wrote:

Quote:

Gary, you don't mention if you file single or joint.
For single, your 28% bracket in 2008 goes from $78,850 - $164,550
If Joint, the 28% bracket from $131,450 - $200,300

I think converting enough to 'top off' just that bracket may be a
helpful strategy. Without more numbers from you, I can't tell for sure.
But any more (converted) will send you into the 33% bracket, which is
really the highest rate for you. I doubt you'll be subject to that rate
despite future changes to the tax rates. The 'phantom tax rates' created
by phaseout of entitlements are a tough one. You are penalized for your
own success and thrift.

Joe

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Tad Borek

Posted: Thu Aug 28, 2008 7:00 pm

Guest

Gary wrote:

Quote:

I'm seriouisly considering converting all the IRA money (after he
RMD) to Roth IRA this year. I would have one big tax hit next April
(hopefully still at low tax rates) and considerable tax and entitlement
relief in future years. In addition I am considering converting
most-to-all of my regular investments to tax-frees.

Gary, if your income is "well over $100k" you can't convert your IRAs to
Roth IRAs - Roth conversions are only allowed if your adjusted gross
income does not exceed $100k. This limit goes away in 2010, but this
conversion idea doesn't sound like an option until then.

It would help if you shared the breakdown of total income into
dividends, pension income, IRA MRD, Social Security, etc. Can't tell
from your post whether you're talking about RMDs of $70,000 with some
Social Security and not much pension/dividend income (which could be a
million-dollar IRA) or $20,000, with a lot of pension & dividend income.
The immediate tax hit on a large IRA conversion could deplete 40% or
more of the IRA, and you'd need some pessimistic assumptions about
future tax rates to justify doing that. Giving the breakdown could allow
an estimate of the immediate tax hit.

Also - do you live in a state with income tax?

-Tad

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jIM

Posted: Fri Aug 29, 2008 12:13 am

Guest

On Aug 28, 5:04 am, Gary <gary...@hotmail.com> wrote:

Quote:

I generally agree with joetaxpayer. Only convert to cap out current
bracket and the advice to keep accounts diversified is where I am at
40 years behind you.

The primary tax assumption I make when planning is for the prolonged
future the US will have an income tax, and that tax will be tiered
with brackets.
The caps to the brackets change every year.
I assume the percentages of the tax will change about every 5-10 years
then stay fixed for another 5-10.

My goal is to stay in the second lowest bracket (15% right now) for as
long as possible. Our gross income is 104k and deductions put taxable
income at 62k right now- so I have lots of tax planning I do to meet
that "stay in second lowest bracket" goal. Having twins in 2008
helped that cause (two more dependants), 401k contributions
increasing, using HSA as well.

My prediction is I go from 15% bracket to 28% bracket reasonably
quickly- as my mortgage gets paid down (biggest deduction is the 20k
of mortgage interest we pay each year) and my income goes up (wife and
I get 3% raises every year and I anticipate 2 raises in 2008 for me).
We have much 401k wiggle room (we contribute only around 10k total
now), and some HSA wiggle room (contributed only $1300 in 2008), but
probably not enough to maintain 15% bracket for more than another 5-10
years.

Quote:

From an investing standpoint, one thing I am doing is creating taxable
accounts now (while in 15% bracket) and not increasing 401k

contributions until I need the extra deductions. When I retire I want
much of the taxable account to be either dividends, cash or muni bonds.

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Guest

Posted: Fri Aug 29, 2008 12:54 am

joetaxpayer <joetaxpayer@nospam.com> writes:

Quote:

Gary wrote:

[considering rolling IRA to Roth, paying taxes now]

Quote:

Just be careful - the "marginal rate" according to the tax
tables is far from the whole picture. If you push your AGI
up by doing this, it can affect other things which have
AGI-tied phaseouts, as well as the potential deductibility
of certain things (ie. medical and miscellaneous dedutions).

The only way to really know how this will affect your overall
taxes is to actually run the numbers on your individual
situation. It may be worth paying an accountant to do it
for you.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

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MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
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Elizabeth Richardson

Posted: Fri Aug 29, 2008 3:00 am

Guest

"joetaxpayer" <joetaxpayer@nospam.com> wrote in message
news:SvWdnahMXZZ9XivVnZ2dnUVZ_rzinZ2d@comcast.com...

I'm age 75

Quote:

and as a result taking out RMDs on these IRAs. These RMDs push my income
(pension, dividends and social security) to well over $100,000, causing
me to spend more for medicare.

Gary, you don't mention if you file single or joint.
For single, your 28% bracket in 2008 goes from $78,850 - $164,550
If Joint, the 28% bracket from $131,450 - $200,300

I think converting enough to 'top off' just that bracket may be a helpful
strategy. Without more numbers from you, I can't tell for sure.

Joe, although I don't remember any of the particulars, this sounds like a
situation in which your strategy of donating RMDs to charity might apply.
Perhaps you could repeat it here.

Elizabeth Richardson

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Ron Peterson

Posted: Fri Aug 29, 2008 8:24 am

Guest

On Aug 28, 4:04 am, Gary <gary...@hotmail.com> wrote:

Quote:

The others are right about watching what tax bracket you will be in.
If you are in a state that taxes standard IRA withdrawals, you might
want to move before you convert.

Quote:

The economic advantage or disadvantage of doing this depends very
heavily on the assumptions, especially the assumptions about tax rates
in future years. Those of you involved in financial planning: what are
you assuming about tax rates in the next 5-10 years?

Because the national debt is so high, there won't be much drop in the
tax rate for upper brackets, but there might be a drop for the lower
brackets.

Quote:

Also, if you care to comment about this, what other assumptions do you
think are critical? And is there anything so stupid about this
conversion plan of mine that I have completely overlooked?

Don't forget about the AMT which can cause you do lose various
deductions if your AGI causes it to set in.

--
Ron

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Chip

Posted: Fri Aug 29, 2008 6:05 pm

Guest

Ron Peterson wrote:

Quote:

Because the national debt is so high, there won't be much drop in the
tax rate for upper brackets, but there might be a drop for the lower
brackets.

Not to get political on this non-political group, but that may very well

depend on who controls the Congress and WH in Jan.

Chip

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Augustine

Posted: Fri Aug 29, 2008 7:00 pm

Guest

On Aug 28, 4:04 am, Gary <gary...@hotmail.com> wrote:

Quote:

Those of you involved in financial planning: what are
you assuming about tax rates in the next 5-10 years?

There's a 49.5% chance of the tax rates going up, 49.5% of going down
and 1% of remaining the same. Therefore, you should hedge.

HTH

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to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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