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Old 01-25-2010, 02:42 PM
 
Location: WA
5,394 posts, read 21,393,457 times
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Just did an estimate to see the impact of a large withdrawal to pay off the mortgage and was taken back by the tax liability.

We bought our home right before we were forced into retirement by the collapse in the economy. I financed it for thirty years, although at the time intended to pay it off before full retirement but the drop in the stock market and value of real estate holdings eliminated that plan.

I am working a transaction to refinance (5.75 to 4.75%) and decided it was worth the time to look at self financing since the fees and taxes are so high. Wow! If I withdraw enough to cover the full mortgage the taxes (no penalty) are 20 times what we paid last year!

The plan now is to go through with the refinance and to just withdraw (or convert to Roth) as much as possible from of the IRA every year while keeping taxes at a low rate. Maybe ten years down the road things will look different.

Just goes to show that tax deferral does have disadvantages as well as advantages.
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Old 01-25-2010, 03:45 PM
 
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That is evident when you look at tax deferment programs like Non-roth IRAs.But it allows you to bulid wealth o what otherwise would have been taxes.
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Old 01-25-2010, 04:08 PM
 
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if your not in a lower bracket later on then you grow nothing extra..if taxes are the same its a wash....

you think you are growing money on the tax money but you really arent....

the taxes are just that much more on the amount you grow ,,... a 25% tax at the end is identical to a 25% tax right at the beginnng and they net out the same.....

what your counting on is a lower tax rate later on but they may or may not pan out going forward.

4000 bucks in a deductable ira that doubles is worth 8,000 less as an example 25% in taxes ,thats 6,000 net.

taking 4000 and paying the taxes up front like in a roth leaves 3,000 left to grow. if that doubles its the same 6,000 net.

Last edited by mathjak107; 01-25-2010 at 04:43 PM..
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Old 01-25-2010, 04:31 PM
 
Location: WA
5,394 posts, read 21,393,457 times
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Quote:
Originally Posted by mathjak107 View Post
if your not in a lower bracket later on then you grow nothing extra..if taxes are the same its a wash....

you think you are growing money on the tax money but you really arent....

the taxes are just that much more on the amount you grow ,,... a 25% tax at the end is identical to a 25% tax right at the beginnng and they net out the same.....

what your counting on is a lower tax rate later on but they may or may not pan out going forward.

4000 bucks in a deductable ira that doubles is worth 8,000 less as an example 25% in taxes ,thats 6,000 net.

4000 paying the taxes up front like in a roth leaves 3,000 left to grow. if that doubles its the same 6,000 net.
Yes, I understand what you are saying but the point I was making was the large withdrawal would push me into a tax bracket I have not seen in years. Going from an effective tax rate about 10% to one over 25% is a shock.
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Old 01-25-2010, 04:42 PM
 
71,520 posts, read 71,712,424 times
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i was freaking looking at what i would owe if i did a roth conversion this year. even split over 2011 and 2012 it was an incredible anount.

i know exactly what you felt.

Last edited by mathjak107; 01-25-2010 at 04:58 PM..
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Old 01-25-2010, 09:07 PM
 
Location: WA
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Quote:
Originally Posted by mathjak107 View Post
i was freaking looking at what i would owe if i did a roth conversion this year. even split over 2011 and 2012 it was an incredible anount.

i know exactly what you felt.
Was just thinking about the timing. Assuming the expiration of the Bush tax cuts in 2011 the top income tax rate will rise to 39.6% from 35%.

And once the funds are in taxable accounts you have to be aware that the dividend tax rises to 39.6% from today's 15%. The capital gains tax rate will rise to 20% from 15%.
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Old 01-26-2010, 01:16 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
22,558 posts, read 39,944,045 times
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Quote:
Originally Posted by cdelena View Post
Just did an estimate to see the impact of a large withdrawal to pay off the mortgage and was taken back by the tax liability.

...
Just goes to show that tax deferral does have disadvantages as well as advantages.
Quote:
Originally Posted by cdelena View Post
... Going from an effective tax rate about 10% to one over 25% is a shock.
No one knows what the future will bring in the line of taxes, But I don't foresee them getting cheaper than 2010, even for those of us in the lower ranges. I did a ROTH conversion in 2009, and will do one in 2010. I have 40 + yrs in retirement coming, and I may have seen the last of <8% marginal rates (As they have been lately, as I've been cashing in my LTCG's. I am paying the gains on my properties, and will start anew with a re-adjusted basis and battered prices, so hopefully a chance at some upside (tho I'm not planning to get greedy)
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Old 01-26-2010, 12:19 PM
 
48,516 posts, read 83,922,814 times
Reputation: 18050
Quote:
Originally Posted by mathjak107 View Post
if your not in a lower bracket later on then you grow nothing extra..if taxes are the same its a wash....

you think you are growing money on the tax money but you really arent....

the taxes are just that much more on the amount you grow ,,... a 25% tax at the end is identical to a 25% tax right at the beginnng and they net out the same.....

what your counting on is a lower tax rate later on but they may or may not pan out going forward.

4000 bucks in a deductable ira that doubles is worth 8,000 less as an example 25% in taxes ,thats 6,000 net.

taking 4000 and paying the taxes up front like in a roth leaves 3,000 left to grow. if that doubles its the same 6,000 net.
It is alweays based on withdrawing when your income is lower;otherwsie their is nopt a rson to have a IRA. That is why you draw it out over long period when your other income is less. You don't pay has much taxes on the IRA contribution compared to savings and you earn money on that amount over a extended time including interest then you draw it out at a time where your other income is less and over a long period. It works like all tax deferred accounts.
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Old 01-26-2010, 12:43 PM
 
71,520 posts, read 71,712,424 times
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well heres the delema... if your thinking of withdrawing a lump sum like the origional poster or doing a fairly large roth conversion odds are you will be in a higher bracket then when you were even working depending on the amount...

i know if we do the roth conversion i not only would be in a higher bracket because of the amount of the conversion being added to our income but i will be hit possibly with the amt tax as well....

the other issues is when the bush tax cuts end there is good chance our normal withdrawls maybe even higher then our working years. dont forget right now historically taxes are on sale... we are at the lowest rates in our history.. there is a good chance that will change.

Last edited by mathjak107; 01-26-2010 at 12:51 PM..
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