roth conversions (social security, inherit, state, retired)

[mathjak107]

i started looking into the upcoming roth conversions next year as ill be eligible and so i have been tossing the pros and cons .

it all boils down initially to whether you think you will be in a higher bracket or lower bracket without a paycheck then you are with one.

but as i dug a little deeper im seeing the real value is not in the above but in wealth passing. its got to be the most incredible deal of the century for passing wealth to your kids.

imagine instead of spending down your ira or 401k at 70-1/2 and reducing the compounding of it, imagine keeping it all going and giving your kids a lifetime of tax free income and continued compounding.

its fabulous for that, in fact if you still can do it leave some to your grandchildren and get close to 100 years of compounding tax free...

but becareful , theres a trap in this deal... the kids have to start taking distributions by dec 31st in the first year of death of the owner according to the irs life expectancy charts.... if they blow it and miss doing it, then the roth has to be disolved over a 5 year period.

the goose that lays the golden egg is dead. the tax free compounding and withdrawls for a lifetime will end....

im going to start reading ed slotts book to fine tune all this but it sounds really promising.


the best part is you can convert next year, pay no taxes next year... you can then pay 1/2 the taxes in 2011 and 1/2 in 2012. the beauty of that is ill be retired , living in PA with no nyc taxes and no paycheck to boost my bracket..

one more word of caution becareful of how much you convert. you can boost your income for the year unknowingly right into amt tax zone.... that would be a horrible event and would probley leave you alot poorer then you should be. no one talks about the amt and conversions but it hits hard when it kicks in at some magical point.

if your going to end up spending all your retirement nest egg then the slight difference in gains between the roth or traditional wont make that much difference.

but for me its about taking the amount of money i know ill never hopefully get down to spending and putting that in the roth for my kids and grand children one day.

can you imagine 100 years of tax free compounding , phew! that would grow amazing amounts of money.

[StealthRabbit]

It's also not a bad deal (for next 2 yrs) for current young retirees in low tax brackets. I don't envision tax rates declining below current rates, and I've been fortunate to keep effective rate low by scheduling LTCG's and charitable contributions. I don't intend on leaving anything behind (except to existing family foundation). But I consider future tax rates to be potentially dangerous. Tax Free income will be nearly as good as cash (hopefully better if returns outstrip inflation). I have always targeted my highest growth into my ROTHs. + I can take out contributions after 2 yrs w/o a penalty if necessary. (I'm a far bit below age 59.5). I had my kids into ROTHs by age 12, and that was very helpful for their college financial aid package. (their income @ age 12 was from farm / 4H income and helping with investment properties and manufacturing projects)

[mathjak107]

i agree with you about lower income earners especially young ones starting their careers doing a roth... the jury is out as far as whether we will all see higher income taxes or not though. tax rates have automatically been dropping for over 30 years every year... thats alot of history with soaring deficits .

each year allows more and more thru at lower taxes, whoever imagined earning 68,000 bucks and if your married being in the 15% bracket.....

next year will see us cross into the 70 thousand range for 15%... i remember earning 50,000 and being in the 25% decades ago

180 million voting retired baby boomers says income taxes stand a real good chance of not going up as every political party fears telling us we are raising your income taxes... we will see everyother tax soar in my opinion but i think the middle range of income taxes will stay sacred for at least the baby boomer generation.

no one can really argue either way as we all dont know but my planning is always based on what was,what is and what makes sense of being.. there are soooo many what if's and so many things that look like its the only outcome and then some event not even on the radar knocks everything off course.

dont forget every major downturn comes from good times, when things couldnt look better and VOOM right to the basement we go.

the reverse is true too, every bull market starts from the depths of hell where the word stocks makes you vomit.

with all the hyper-inflation predicted and the wild spending the long term bond market looking out 30 years is only around 5%. historically its around 7% so what the heck does the bond market see that we all dont?

remember when we all used to laugh at the rates on a passbook savings account? who ever thought 40 years later with all that wild spending and predicted inflation we would be getting less than 1/2%.....


i like roths but not for any tax savings we may or may not see as compared to a traditional ira or 401k ,but i love them for transfering whatever is left over when my wife and i are done to our beneficiaries.

.. i read thru a roth legacy trust you can go 150 years with no taxes and compounded growth providing over a century of tax free withdrawls at the same time. how amazing is that.

ed slott is the master at all this and im just going to start reading his book over the weekend.


using roths , trusts and single premuim life insurance he has methods for transferring amazing amounts of money from your estate without the tax man killing you.

do you know there was a tax case a few years ago where an estate was inheirited by the kids. the estate taxes, death taxes, income taxes on the estate and income taxes on the kids share came to more then the estate was worth. THE KIDS ACTUALLY OWED MORE THEN THEY GOT.

they took it to tax court and the irs admitted they fouled up and nice guys that they are, we now have a law that says you can never owe more then you get.... NICE OF THEM.! WE CAN ALL REST IN COMFORT KNOWING OUR KIDS CAN NEVER OWE MORE THAN 100% OF WHAT WE PASS ON TO THEM.


thats why tax planning is so important, and it looks like the biggest guns are trusts, roths and life insurance.

if you'all are really interested in this stuff ill keep you posted as i get an education in this stuff.

[cdelena]

I have never worked too hard trying to anticipate tax rates in the future... the attraction of the Roth for me has been to minimize the impact of RMD and to insure I better understand what I am leaving to heirs.

[Lakewooder]

Yeah BUT, what if the government changes the rules of the game?

I'm just over 50 but considering early retirement just so I can convert the 401K to a IRA and then go Roth..that way income would be down the first couple of years as I have a couple of properties to pay off...I will definitely have a much higher income in retirement. I already have a small Roth IRA.

Not sure if it's really worth it for me but I really don't plan on touching it (thanks for the reminder cdelena about RMD) unless there is an emergency. I would like to leave it to my niece.

[mathjak107]

anything is possible...

we can "what if : lots of things . we can what if the fact that maybe the entire income tax system will be done away with and we go to a vat tax system....

i plan though like i said for what is , what was and what looks like will be. a good plan though has slack just in case things change on you too.... it just might not work out as well but no disaster either..

[akck]

My thinking on doing a Roth conversion is to leave a tax free legacy to the kids. The conversion calculators all point to it being close to break even, so we won't be doing it for us. We will have to wait until I'm in retirement with less income in order to manage the taxes. We'll re-evaluate it at that time with the then current tax code.

I'm guessing they will never directly tax Roths. They'll likely get at them by ending contributions and conversions and by creating a national sales tax.

[mathjak107]

Exactly why we will be doing it,,, ill convert next year, we are living in new york city which has a very high city and state tax... ill get to pay the taxes
the following 2 years when im retired in PA and no pay check or social security coming in. ill be in the lowest bracket i can ever remember.

[mathjak107]

one little pitfall your heirs have to be aware of.

they must start to take dstributions in the following year after your death either by the life time expectancy chart or by withdrawing it all over 5 years.

the pitfall is your heirs need to know somehow if the roth they inherited is under 5 years old. they can then only take the contribution amount as withdrawls but not the earnings until after the roth is 5 years old. i believe it starts when the origional owner started it and it goes by total time between the owner and heirs.

with the lifetime withdrawls i can see a problem if the markets sky rocket like they just did and perhaps the minimum withdrawl for your heirs is more then the principal only... not likly but could be a problem

i think it would definatly be an issue if they went for the 5 year method as those withdrawls are much larger then the lifetime income method.


once your heirs choose a method of withdrawl either lifetime or all over 5 years they cant change.

[Minervah]

This interests me because for the first time my company is offering a 401k Roth Plan besides our traditional 401ks. I don't have any heirs, my beneficiaries will be maybe my sisters and definitely to my favorite charitable organization. So I wonder if a Roth will be of any use to me.