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To Roth or not to Roth?
Waterbury Republican-American ^ | January 24, 2010 | Eileen Ambrose

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 Once in the Roth, though, your money and any earnings can be withdrawn tax-free in retirement.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.


TOPICS: Business/Economy; Extended News
KEYWORDS: 401k; ira; retirement; roth

1 posted on 01/24/2010 11:20:52 AM PST by Graybeard58
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To: Graybeard58

I may do this....thanks for the reminder.


2 posted on 01/24/2010 11:23:01 AM PST by Rick_Michael (Have no fear "President Government" is here)
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To: Graybeard58

Roth bump


3 posted on 01/24/2010 11:28:09 AM PST by Taffini ( Mr. Pippen and Mr. Waffles do not approve)
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To: Graybeard58
To each his/her own, but I would strongly advise against a Roth conversion.

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?

4 posted on 01/24/2010 11:30:08 AM PST by Alberta's Child (God is great, beer is good . . . and people are crazy.)
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To: Alberta's Child

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%.


5 posted on 01/24/2010 11:49:48 AM PST by adm5 (THE COMING TAX REVOLT SHOULD BE THE LAST THING OBAMA & CO. SHOULD BE WORRIED ABOUT.)
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To: Alberta's Child
I have no faith that Congress will keep the full tax exemption for withdrawals from Roth IRAs in place

When the time is right, the govenment will simply vote themselves every last penny belonging to the boomers (and any remaining parents of boomers).

Mr. niteowl77

6 posted on 01/24/2010 11:56:07 AM PST by niteowl77 (You wanted him, and now you have got him. I say, "Good day to you," America.)
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To: adm5

You don’t think they are going to tax coming and going?

Otherwise the Roth sounds attractive.


7 posted on 01/24/2010 11:59:38 AM PST by Norman Bates
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To: Alberta's Child
A.C., there is an enormously greater risk, to wit, the plan being floated by the thieves in DC to **forcibly** convert IRAs (of whatever type), 401k plans and 403b plans into Treasury paper paying -- wait for it -- 2 to 3 per cent.

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.

8 posted on 01/24/2010 12:00:11 PM PST by SAJ
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To: Alberta's Child

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.


9 posted on 01/24/2010 12:00:46 PM PST by Norseman (Term Limits: 8 years is enough!)
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To: Norman Bates
Yes, they will. Not a doubt in the universe.

First chance they can, if they think they can get away with it.

10 posted on 01/24/2010 12:01:40 PM PST by SAJ
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To: Alberta's Child

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.


11 posted on 01/24/2010 12:04:50 PM PST by KYGrandma (The sun shines bright on my old Kentucky home......)
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To: Graybeard58
Definitely Roth!


12 posted on 01/24/2010 12:09:56 PM PST by LibertarianInExile (When Republicans don't vote conservative, conservatives don't vote Republican.)
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To: SAJ
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.

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.

13 posted on 01/24/2010 12:12:03 PM PST by EVO X
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To: Graybeard58

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!


14 posted on 01/24/2010 12:13:06 PM PST by orinoco
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To: Norman Bates

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.


15 posted on 01/24/2010 12:13:25 PM PST by adm5 (THE COMING TAX REVOLT SHOULD BE THE LAST THING OBAMA & CO. SHOULD BE WORRIED ABOUT.)
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To: EVO X
Fair enough. You may be of an age where either the tax code (temporarily) works in your favour by contributing, or works against you by withdrawing.

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!

16 posted on 01/24/2010 12:18:57 PM PST by SAJ
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To: SAJ
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.

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.

17 posted on 01/24/2010 12:27:35 PM PST by EVO X
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To: Graybeard58
I am doing the conversion this year, moving an old 401(k) and traditional IRA over to my Roth account. The bulk of my retirement savings is tax-deferred (like a regular IRA), not tax exempt (like a Roth), so I want to hedge my risk. I know that they *could* retroactively change the rules on Roths, and I know that rates *might* go down or I might be in a lower bracket when I retire. But without a Roth, I am essentially betting everything in the other direction. I need to be covered either way.

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.

18 posted on 01/24/2010 12:35:39 PM PST by kalt
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To: Alberta's Child

“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.”

Agreed wholeheartedly.

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.

Watch...

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.


19 posted on 01/24/2010 12:41:00 PM PST by aMorePerfectUnion
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To: Graybeard58

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.


20 posted on 01/24/2010 12:49:02 PM PST by avenir
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To: EVO X
I think you would see the same type of voter backlash we have with the attempted health care grab.

I'd think it would be greater, at least I would hope so. This wouldn't be mere 'tinkering', it would be, in effect, outright confiscation. A very dangerous, peronist way of economic management. But then, it might be 'fairer' to our grandchildren, taking money we've earned twenty years ago and burning it now. Kind of gives a sort of immediacy to the problems that are out there today.

21 posted on 01/24/2010 12:50:21 PM PST by Seven plus One
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To: Graybeard58
I think the most likely scenario is that they will take away the ability to leave a Roth to your heirs tax-free, so it will be in your best interest to try to die without a Roth. However, the best strategy for me (mid-40’s) is to go with the Roth, convert as much of my traditional retirement money into Roths as I can afford, and vote for conservative candidates.

I can't control what they do to me in the future, but I can do what I can within the law to provide for myself as well as I can. For now, for me, investing retirement money in a Roth is the wisest decision. I can't go around refusing to do what is wise in the current environment because of what someone **MAY** do in the future.

22 posted on 01/24/2010 1:04:43 PM PST by Stegall Tx (Democrats: raising your taxes; cheating on theirs.)
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To: EVO X
You may be right as to backlash, but the current group of thieves are kamikaze: with them, it's 'damn the torpedoes'...and there are probably enough 'fiscally responsible' (read: greedy) 'Pubbies to go along with them.

I absolutely consider that their belief is along the lines of "if we pass it (IRA confiscation or, indeed, any other part of their Fascist/Marxist agenda), it won't ever be repealed whether we're still here in the Regress or not".

23 posted on 01/24/2010 1:06:09 PM PST by SAJ
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To: Graybeard58

IIRC, people above the income cap for a Roth are allowed to convert existing accounts, but NOT to contribute new funds after that.

I’m in the “yeah, right, you won’t decide to tax/take it later” camp myself anyway (after tell anyone who saved for retirement that they will receive no SS, since we don’t “need” it).


24 posted on 01/24/2010 1:54:02 PM PST by Darth Reardon (Im running for the US Senate for a simple reason, I want to win a Nobel Peace Prize - Rubio)
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To: SAJ
I absolutely consider that their belief is along the lines of "if we pass it (IRA confiscation or, indeed, any other part of their Fascist/Marxist agenda),

They don't have any constitutional authority to grab accounts or dictate allocations. If they really need the money, they would just stop the program or reduce the amount you can put away. The other thing they could do is just raise SS taxes. That is way you rip people off.

25 posted on 01/24/2010 1:58:12 PM PST by EVO X
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To: SAJ; Norman Bates
First chance they can, if they think they can get away with it.

Perhaps I'll regret saying this, but I don't think even the Democrats are that stupid.

Social Security was the "3rd rail" in politics for the longest time, and still is -- to a lesser extent. But, one of the reasons it's less "untouchable" is because so many people have alternative assets (401(k), IRA) to fall back on.

For most, Social Security doesn't have a "cash value" associated with it. Yes, you and I can assign a cash value to a future stream of income, but most people don't see it that way. So, adjustments to Social Security are only vaguely related to your pocketbook, unless you are already collecting benefits and see the amount reduced now.

However, even after the financial disaster of 2007 and 2008 (aided and abetted by the government, IHHO), account holders still have an accumulation of financial assets. It has a tangible value -- even if it's only a number on a monthly statement. It may be less than before, but it's still a real "nest egg", not just a promise of future income.

Any attempt by the government to grab that "egg" will be met with visceral reaction. Even if they tried to retroactively change the rules (i.e. making Roth IRAs withdrawals taxable), Congressional incumbents would become an endangered species.

I do expect them to modify the rules for future contributions -- i.e. reducing 401(k)/IRA contribution limits or even prohibiting contributions to Roth IRAs altogether.

With respect to the original article: my plan is to indeed convert IRA funds into a Roth IRA, but not now. I'm going to wait until I'm retired and living off non-IRA assets. My taxable income will be minimal, and my marginal rate will be much lower. You can continue to convert funds from an IRA to a Roth IRA until you are age 70-1/2, so there's no hurry.

26 posted on 01/24/2010 2:31:54 PM PST by justlurking (The only remedy for a bad guy with a gun is a good WOMAN (Sgt. Kimberly Munley) with a gun)
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To: LibertarianInExile

I prefer Diana Roth.


27 posted on 01/24/2010 3:03:00 PM PST by Graybeard58 ("0bama's not just stupid; He’s Jimmy Carter stupid”. - Don Imus)
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To: Graybeard58

I can’t invest worrying about what the rules “might be” down
the road. I prefer to deal with the game as it’s being played
at present. If the rules change, so does my strategy.
No one should be without a Roth IRA gaining themselves at least 8% (mine’s up 57%) tax free right now. It’s a no brainer.


28 posted on 01/24/2010 3:33:41 PM PST by Fireone (Know the 2nd Amendment......it's all we have left.)
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To: Alberta's Child
It's a tough call.

On the one hand, you have the probability of tax rates going up, on the other, the certainty of paying taxes up front. If you have a separate large sum standing by to pay the taxes without cutting into your IRA principal, it might be OK. But if not, your Roth is going to be a lot smaller than your current IRA.

29 posted on 01/24/2010 7:32:41 PM PST by expatpat
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To: expatpat

A roth IRA only really makes sense to me if:

1. you are already taking advantage of employer match (free money)

2. you don’t need the money for 5+ years (you can’t get access to liquid cash without being penalized)

3. If you really like leverage (real estate, options etc)

The way we use the funds is to write mortgages to my friends and business partners. He funds my real estate deals, I fund his through the SD roth IRA. We build a 15-20% return into our loans.

You can also use the money for options. buy the optino with $1000 or so, then take the profit from the (stock, real estate) and its leveraged back in for tax free returns.


30 posted on 01/24/2010 7:50:40 PM PST by 1st I.D Vet
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To: adm5
Right. I should point out that my previous post was aimed at a Roth conversion from a traditional IRA, and not Roth IRAs in general.
31 posted on 01/25/2010 7:46:31 AM PST by Alberta's Child (God is great, beer is good . . . and people are crazy.)
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To: SAJ

Interesting perspective. If no “official” retirement planning mechanism is safe here in the U.S., then the whole issue of 401(k) vs. traditional IRA vs. Roth IRA is a moot discussion.


32 posted on 01/25/2010 7:49:47 AM PST by Alberta's Child (God is great, beer is good . . . and people are crazy.)
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To: Alberta's Child
Well, it's not moot quite yet. When the Regress put their confiscationist hand in the pie, though, it will be.

Not joking at all about starting to convert dollar assets to other currencies, either.

33 posted on 01/25/2010 8:59:44 AM PST by SAJ
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