Skip to comments.To Roth or not to Roth?
Posted on 01/24/2010 11:20:52 AM PST by Graybeard58
The buzz in the financial industry right now is about Roth IRA conversions. Starting this year, there is no longer an income cap to convert a traditional individual retirement account or 401(k) into the tax-friendly Roth. Essentially, everyone now has access to a Roth.
Congress did this to generate tax revenue. Contributions to a traditional IRA and 401(k) are often made with dollars that haven't been taxed yet. When you convert an account to a Roth, you must pay regular income tax on the amount being converted. Once in the Roth, though, your money and any earnings can be withdrawn tax-free in retirement. You might want to convert to a Roth to leave a tax-free account to heirs, or to diversify your tax situation so at least some of your income won't be subject to taxes when you're retired.
But for most of us, the decision to switch will come down to whether we'll be in a higher tax bracket in retirement than we are today. If you think you will be which is likely for younger professionals consider a Roth conversion.
Financial planners and tax professionals have little doubt tax rates will go up, so you would be spared having to pay at those higher rates.
"Entitlement programs. Wars. The deficit. Any reasonable person will tell you taxes are going to go up," said Tom Karsten, a financial planner and tax specialist in Fort Worth, Texas.
To help you figure whether to convert, and the tax consequences, Fidelity Investments offers an online calculator at fidelity.com/rothevaluator.
I may do this....thanks for the reminder.
A lot can change between now and retirement (depending on your age), and I have no faith that Congress will keep the full tax exemption for withdrawals from Roth IRAs in place. Why convert now -- and pay income tax on the conversion -- and run the risk of getting it taxed again?
For people just out of college, or those who have never invested before and are starting from scratch, there is no doubt that a Roth IRA is the one to start vs. the traditional.
But for people with large accounts in traditional IRA’s - I see your point 100%.
When the time is right, the govenment will simply vote themselves every last penny belonging to the boomers (and any remaining parents of boomers).
You don’t think they are going to tax coming and going?
Otherwise the Roth sounds attractive.
Anyone, and I mean ANYONE, who holds these plans and can draw them down without serious tax consequences should do so forthwith. It may even be the case for some folks that they should begin drawing down without regard to the immediate tax consequences.
Further, for those nearing 59 1/2 (the magic age for penalty-free,but not [necessarily] tax-free, withdrawals), I should strongly recommend converting a healthy chunk of dollar-based assets to assets based in currencies that are heavily supported by hardish assets, Norwegian kroner being perhaps the prime example just now.
Trust government not to mess with retirement plans, for the next 3 years at minimum, and you are a HEAVY favourite to live out your life far poorer than you would be.
Exactly. 10 to 20 years from now, or longer, some people will have millions of dollars of investment income piled up in these accounts and interest rates will be higher.
For example, a person with 15 million dollars at rates of 8% will be earning each year $1.2 million! off of the account. To expect Congress to sit by and watch all this money be earned and spent tax-free is asking a lot. Eventually, they will yield to the next surge of Populist pressure, claim it’s unfair, and tax the bejeezus out of them.
First chance they can, if they think they can get away with it.
Our financial adviser told us is was not a good idea. With hubby back working again, it would cost too much in taxes. He recommends waiting until he retires again. And not convert all, just part.
I am taking the opposite approach. I am contributing as much as I can to Roth accounts before tax rates likely go up next year.
You plan just in case but I disagree with the premise! With conservatives in charge government revenue can increase by growing the economy just as has been don countless times. We need to reduce taxes and shrink the size of government!
There’s no downside for someone starting out with zero money opening a Roth.
But, someone who has a sizable sum in a traditional IRA - thinking about switching over to a Roth (to take advantage of the tax benefits) should probably worry about the goons in D.C. changing the tax-rules on the Roths, like the earlier poster said.
The former will no longer be in your favour when -- not if -- the thieves force you to convert your Roth to whatever form of Treasury toilet paper they concoct. Take it to the bank: they will do this in fairly short order.
Good luck to you!
I don't think the independent voter will stand for much tinkering with these retirement accounts. I think you would see the same type of voter backlash we have with the attempted health care grab.
Plus the Roth lets you withdraw your principal tax-free and penalty-free whenever you want (once you have had the account for five years). And there are no mandatory distributions when you retire. And there are favorable inheritance provisions.
Also, converting this year allows you to spread the tax hit over 2011-2013 instead of having to take the whole hit in April 2011.
“A lot can change between now and retirement (depending on your age), and I have no faith that Congress will keep the full tax exemption for withdrawals from Roth IRAs in place.”
Given at least 35 TRILLION of unfunded liabilities in social programs and a massive deficit with little economic growth, ROTH IRA holders will be surprised that the Feds can go back on their word.
I just say, they’ve done it before. They can do it again.
They will get your taxes now plus they will tax Roth’s later. Plus they will require you to buy T-bonds with your money so they can use it in the meantime.
In fact, I’m not so sure that less government control of retirement isn’t better. I am keeping far more outside the retirement system.
Financial decision-making is the one area of life where I would love to turn it all over to some fantasy expert, one who knew all, could be trusted to the Nth, etc.
I have no feel for it, and studying it leads to a house of mirrors where nothing seems real and conclusive.