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 Once in the Roth, though, your money and any earnings can be withdrawn tax-free in retirement.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.
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.
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.
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".
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).
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.
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.
I prefer Diana Roth.
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.
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.
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.
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.
Not joking at all about starting to convert dollar assets to other currencies, either.