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Finance & Stock Groups Forum Index » Financial Planning » Pls dbl-check thots about Trad v. Roth IRA
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| nomail1983@hotmail.com |
 Posted: Thu Jul 12, 2007 1:04 pm |
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By the time Roth IRAs were invented, I was already earning too much to
qualify. (A nice curse to have.  So I have not studied Roth IRAs
very closely. Now that I no longer need to work, I want to make Roth
IRA contributions so that the earnings are tax-free. But of course,
that requires a certain amount of wage income. Right now I have
none(!). (Another nice curse to have, if by choice. :-)
However, I do have a significant amount of funds in Trad IRAs. In a
year or so, I will be able to make post-59-1/2 withdrawals without
penalty. Although that is taxed as ordinary income, I might start
making some reasonable withdrawals then in order to reduce my future
tax bracket when RMDs start at 70-1/2. (I have to study how all this
affects SSA distributions, if at all, whenever I decide to start
taking them. Another conversation, another time.)
Would this be reasonable plan? ....
For whatever amount I would choose to withdraw from Trad IRAs between
age 59-1/2 and 70-1/2, convert that amount to a Roth IRA instead. (In
fact, I wonder: do I even have to wait until 59-1/2 to start
converting Trad IRAs to Roth IRAs?)
I believe I still pay the same amount of ordinary income tax. But at
least the investment earnings would be tax-free. I believe I will not
need either the principal or the earnings during this period.
Is the amount that I can convert limited by whatever amount of wage
income I have (or not!) in that year? In other words, I can convert
as much or as little as I want?
If I can do the conversion, I probably would not make any other Roth
IRA contributions. But if I could (i.e. if I have some surplus wage
income), is the amount that I can convert limited by the amount other
contributions that I might make to IRAs in the same year? In other
words, can I convert as much or as little as I want without regard to
any other contributions to IRAs in the same year?
Finally, I am ass-u-me-ing that partial conversions are allowed. Is
that right?
Even if they are not allowed, I have some "small" Trad IRAs that I
would be willing to convert en masse. And over time, I could
rollover large Trad IRAs into smaller ones, if I must in order to work
around the lack, if any, of partial conversions.
PS: I know that I can RFTM about all this in the IRS Pubs, Pub 590 in
particular. And I will. I'm just looking for a quick assessment of
my thoughts to set my expectations. Sometimes it helps to have
expectations in order to make sense of the contorted phrasing of the
Pubs.
TIA. |
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| Elle |
| Posted: Thu Jul 12, 2007 4:05 pm |
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<nomail1983@hotmail.com> wrote
Quote: For whatever amount I would choose to withdraw from Trad
IRAs between
age 59-1/2 and 70-1/2, convert that amount to a Roth IRA
instead. (In
fact, I wonder: do I even have to wait until 59-1/2 to
start
converting Trad IRAs to Roth IRAs?)
You do not have to wait to convert, assuming you meet other
requirements.
There is also a "social security tax trap" that one should
consider when deciding whether to convert. This "trap"
argues for converting to a Roth.
Quote: I believe I still pay the same amount of ordinary income
tax. But at
least the investment earnings would be tax-free. I
believe I will not
need either the principal or the earnings during this
period.
It does indeed often pay even for retirees to convert their
Traditional to a Roth.
Quote: Is the amount that I can convert limited by whatever
amount of wage
income I have (or not!) in that year?
Yes, but it takes "a lot" to be ineligible. See
http://www.fairmark.com/rothira/eligible.htm , for one,
among many other sites. Note especially the changes for tax
year 2010 (knock on wood).
snip
Quote: If I can do the conversion, I probably would not make any
other Roth
IRA contributions. But if I could (i.e. if I have some
surplus wage
income), is the amount that I can convert limited by the
amount other
contributions that I might make to IRAs in the same year?
In other
words, can I convert as much or as little as I want
without regard to
any other contributions to IRAs in the same year?
Correct.
Quote: Finally, I am ass-u-me-ing that partial conversions are
allowed. Is
that right?
Correct. The guideline is to convert only enough to keep you
from landing in the next higher tax bracket. OTOH, if the
conversion puts you a little over, the extra tax you pay on
the amount you go over is often trivial enough that it
doesn't warrant doing what the IRS calls a "partial
recharacterization." The latter lets you take a part of what
you converted to the Roth and put it back into the
Traditional.
Quote: PS: I know that I can RFTM about all this in the IRS
Pubs, Pub 590 in
particular. And I will. I'm just looking for a quick
assessment of
my thoughts to set my expectations. Sometimes it helps to
have
expectations in order to make sense of the contorted
phrasing of the
Pubs.
True, AFAIC. |
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| nomail1983@hotmail.com |
| Posted: Thu Jul 12, 2007 6:58 pm |
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On Jul 12, 5:05 am, "Elle" <honda.lion...@nospam.earthlink.net> wrote:
Quote: You do not have to wait to convert, assuming you meet other
requirements.
Thanks. I have now had a chance to do my homework, and I have
confirmed all that you have reiterated. I appreciate your timely
feedback.
Thanks for the pointer. Fairmark is always a fountain of good
insight. I had no idea such changes were in the offing. How do CFPs
keep on top of all this? How can us mere mortals keep on top of all
this, other than by periodically rereading the Fairmark site (et al)?
Quote: There is also a "social security tax trap" that one should
consider when deciding whether to convert. This "trap"
argues for converting to a Roth.
I presume you are referring to the comments in the Fairmark article
"Tax on Social Security -- Another advantage over the traditional
IRA". If you have something else in mind, I'd appreciate it you would
elaborate.
Thanks again for all your feedback. |
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| Tad Borek |
| Posted: Thu Jul 12, 2007 8:25 pm |
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| Elle |
| Posted: Thu Jul 12, 2007 8:36 pm |
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<nomail1983@hotmail.com> wrote
Quote: See http://www.fairmark.com/rothira/eligible.htm, for
one,
among many other sites. Note especially the changes for
tax year 2010 (knock on wood).
Thanks for the pointer. Fairmark is always a fountain of
good
insight. I had no idea such changes were in the offing.
How do CFPs
keep on top of all this? How can us mere mortals keep on
top of all
this, other than by periodically rereading the Fairmark
site (et al)?
Really, especially given that some 80% of the age-eligible
population have no college degree, are working like dogs
just to keep themselves fed and so, even if they had a great
high school education, often have no time to put into
planning for the future, and so are really hamstrung. I
figure it's chatter at sites like this, on radio talk shows,
by diverse figures such as Suze Orman, Robert Shiller, Alan
Greenspan, and many others talking in the media about
investing, along with seemingly new emphasis at many high
schools on financial planning, that represent our best hope.
In my opinion CFPs are paid to stay on top of this. Not that
they all do--only recently has a college degree even been
required for them, for one.
Quote: I presume you are referring to the comments in the
Fairmark article
"Tax on Social Security -- Another advantage over the
traditional
IRA". If you have something else in mind, I'd appreciate
it you would
elaborate.
Yes, http://www.fairmark.com/rothira/socsec.htm, makes the
point I was trying to introduce. See also
http://www.joetaxpayer.com/ss.html , especially the link on
the second page to some other articles on this, which shows
how dramatic the effect of this tax trap can be. |
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| Elizabeth Richardson |
| Posted: Fri Jul 13, 2007 1:47 am |
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"joetaxpayer" <joetaxpayer@nospam.com> wrote in message
news:Kredna2aCap-WAvbnZ2dnUVZ_vyunZ2d@comcast.com...
Joe, your article references a single person. I'm too lazy to go look at
when the tax rates changes for married filing jointly. Can you share some
facts/insight?
Elizabeth Richardson |
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| joetaxpayer |
| Posted: Fri Jul 13, 2007 1:47 am |
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Elle wrote:
Quote: I presume you are referring to the comments in the
Fairmark article
"Tax on Social Security -- Another advantage over the
traditional
IRA". If you have something else in mind, I'd appreciate
it you would
elaborate.
Yes, http://www.fairmark.com/rothira/socsec.htm, makes the
point I was trying to introduce. See also
http://www.joetaxpayer.com/ss.html , especially the link on
the second page to some other articles on this, which shows
how dramatic the effect of this tax trap can be.
My thanks to Elle, who helped comment on my writing for the above
article. She saw the pre-published copy linked correctly, intended as a
September feature story on my site. I'll leave the link working as the
OP's question was timed perfectly, Elle and I had just finished our
email exchange.
The graph I offer, shows that for a single 65 yr old receiving $15K in
Social Security, that as she approaches $33K of other income (such as
IRA or 401(k) withdrawals, her marginal federal rate will hit 46.25%.
That phantom rate only lasts for 1/3 the value of Social Security income
(i.e. in this example $5K is taxed at this rate). One would think that
with proper planning, it should be possible to avoid this rate by either
(a) keeping withdrawal low enough each year or (b) once past that
phantom rate, 'top off' the current bracket with Roth conversions and
perhaps avoid the bubble in future years.
JOE |
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| joetaxpayer |
| Posted: Fri Jul 13, 2007 1:47 am |
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Elizabeth Richardson wrote:
Quote: "joetaxpayer" <joetaxpayer@nospam.com> wrote in message
news:Kredna2aCap-WAvbnZ2dnUVZ_vyunZ2d@comcast.com...
Yes, http://www.fairmark.com/rothira/socsec.htm, makes the
point I was trying to introduce. See also
http://www.joetaxpayer.com/ss.html , especially the link on
the second page to some other articles on this, which shows
how dramatic the effect of this tax trap can be.
Joe, your article references a single person. I'm too lazy to go look at
when the tax rates changes for married filing jointly. Can you share some
facts/insight?
Elizabeth Richardson
I'm happy to work on that. One of my comments to Elle was that I offered
an example that I ran across. My intent was to produce a next page with
a chart showing a couple. I need to choose two details: ages (under/over
65, as the std deduction is increased for age 65) and combined level of
SS income. Those are the variable I need to fix to produce the data, and
chart. I'd take your input on this.
Thanks,
JOE |
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| Elizabeth Richardson |
| Posted: Fri Jul 13, 2007 5:42 am |
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"joetaxpayer" <joetaxpayer@nospam.com> wrote in message
news:Pu2dnXZfhqgOUwvbnZ2dnUVZ_u6rnZ2d@comcast.com...
Quote:
I need to choose two details: ages (under/over
65, as the std deduction is increased for age 65) and combined level of
SS income. Those are the variable I need to fix to produce the data, and
chart. I'd take your input on this.
Well, no matter which other income vs SS income numbers you choose, it will
be the rare household that matches even close, much less exactly. Since
you'd be looking at married filing jointly, it wouldn't much matter who was
older or by how much. However, at some point the SS income changes from one
benefit to two benefits, which seems to me would complicate computations, or
I would expect it to complicate on which income sources to rely.
Generalizations like you did for the single woman, which demonstrates what
happens when you exceed a certain income from taxable sources would be
excellent and much appreciated.
Elizabeth Richardson |
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