Thinking about converting funds from a traditional IRA to a Roth IRA?

derryb · May 21, 2012 11:13AM

Just a heads up that the federal income taxes you are required to pay on the converted amount from a traditional IRA (untaxed funds) to a ROTH IRA (taxed funds) will probably be much higher after 2012. Amounts converted are subject to the individual's current year tax rate. It's time to start talking to your tax accountant or financial advisor before year end if you are considering such a move.

Note that while a "transfer" from one traditional IRA/401K to another tradition IRA can be made tax free (taxes get paid upon eventual withdrawal), a "conversion" to a Roth IRA is a taxable event because contributions to a ROTH are made with taxed money. The ROTH conversion option is the only way and a great way to fund a ROTH with a whole lot of money at once, even for those ineligible to make ROTH contributions because of income limits.

If you see gains in your future, probably better to convert, and pay taxes now on the converted amount before it grows. Once it grows in a ROTH it can be withdrawn tax free, unless of course tax laws change.

Federal retirees have the same option of converting their Thrift Savings Plan to a private ROTH with one added luxury. They can take any part of the withdrawal in cash to cover the tax bill (see TSP Form 70 intructions to transfer or convert to a private IRA). Any portion taken in cash is subject to automatic 20% federal tax withholding, but that doesn't matter because the total amount is being taken in cash to pay income taxes, they just handle 20% of the tax payment on your behalf.

MsMorrisine · May 21, 2012 11:50AM

and if we renounce our citizenship and become swiss or singapore citizens ?

derryb · May 21, 2012 12:04PM

<< and if we renounce our citizenship and become swiss or singapore citizens ?

>>

First your current government has to approve your request to renounce your citizenship. There was a recent news item where they stamped the application "dissapproved."

Second, you only escape US taxation on future earnings and also have to pay an exit tax on what you remove from the country.

You can run, but you cannot hide.

Justacommeman · May 21, 2012 12:08PM

You will always be taxed by the US if you live abroad. The US is the toughest country in the world to renounce your citizenship. It is the worst on taxing ex pat's. Harry Schultz told me this years ago and he was correct.

Uncle Sam has very long arms. MJ

bluelobster · May 21, 2012 8:47PM

I think the roth is a great option for many. The main problem is that usually it's the older segment of the populous that has the bigger balances in their traditional or deferred account and if you look at the benefit solely from the individual IRA owners perspective it's usually impossible to know if converting a larger amount and paying all the taxes will work out for that single retiree, but if they are doing it to leave a legacy for their heirs it is usually a wonderful option. If younger people are contributing I think it's usually makes since to contribute to the roth to begin with.

One somewhat unknown and valuable option that can be utilized when converting a traditional to a roth, is that if you convert and your investments go down a decent amount within the year you convert, you could re characterize your roth back to a traditional saving a larger tax bite, as long as you do it within the time allowed, which is usually by October 15th of the filing year. you could then convert at a later time saving you a bunch of taxes potentially.

tneig · May 21, 2012 11:17PM

Good Stuff. Pardon the slight detour. Are there PM Roths?

ebaytrader · May 22, 2012 12:25AM

There's sites with IRA to Roth and vice versa calculators. Generally, the older you are the less beneficial the exchange.

jmski52 · May 22, 2012 12:43AM

A few years ago I came to the conclusion that the deferred tax benefits of keeping a conventional IRA and a 401K were going to be outweighed by a steady increase in the marginal tax rate.

That, plus the fact that my income level will be less after retirement led me to make to decision to liquidate those accounts and to buy precious metals with the proceeds.

Interestingly, the lowered income status (having a lower marginal rate during retirement) has always been a justification for having an IRA in the first place. So, I find that earnings from a tax-deferred IRA are somewhat analogous to having physical precious metal during the lower current income retirement years.

As long as precious metals don't get legislated against or crash precipiously, I think that they offer the best advantages simply in being mostly off the grid.

derryb · May 22, 2012 1:05AM

<< A few years ago I came to the conclusion that the deferred tax benefits of keeping a conventional IRA and a 401K were going to be outweighed by a steady increase in the marginal tax rate.

That, plus the fact that my income level will be less after retirement led me to make to decision to liquidate those accounts and to buy precious metals with the proceeds.

Interestingly, the lowered income status (having a lower marginal rate during retirement) has always been a justification for having an IRA in the first place. So, I find that earnings from a tax-deferred IRA are somewhat analogous to having physical precious metal during the lower current income retirement years.

As long as precious metals don't get legislated against or crash precipiously, I think that they offer the best advantages simply in being mostly off the grid. >>

On the other hand the ROTH allows you enjoy all of your gains tax free. I hold physical but I also play the paper metals via ETFs in my ROTH. While the physical has gained much value the ROTH has done even better due to easy ins and outs playing both ups and downs. Physical is not easily traded without expenses and time constraints.

jmski52 · May 22, 2012 1:07AM

On the other hand the ROTH allows you enjoy all of your gains tax free. I hold physical but I also play the paper metals via ETFs in my ROTH. While the physical has gained much value the ROTH has done even better due to easy ins and outs playing both ups and downs. Physical is not easily traded without expenses and time constraints.

Makes sense as a trading vehicle. The gains are still utimately taxable, but deferred until realized - correct?

derryb · May 22, 2012 3:12AM

<< On the other hand the ROTH allows you enjoy all of your gains tax free. I hold physical but I also play the paper metals via ETFs in my ROTH. While the physical has gained much value the ROTH has done even better due to easy ins and outs playing both ups and downs. Physical is not easily traded without expenses and time constraints.

Makes sense as a trading vehicle. The gains are still utimately taxable, but deferred until realized - correct? >>

That's the beauty of a ROTH. Contributions are made with taxed dollars (after tax dollars vs. pre-tax dollars in a regular IRA). Everything in the account and its gains are tax free when withdrawn down the road. Double whammy this year only: get in before the 2013 tax increases AND earn tax free gains.

jmski52 · May 22, 2012 3:27AM

Everything in the account and its gains are tax free when withdrawn down the road.

I had forgotten that all of the proceeds are non-taxable. Perfect for stuff that's going to grow.

tneig · May 22, 2012 3:31AM

I think they say you need some 6 to 8 years turn around time for it to be worth it. At 58 I think I'm good for that. But I have been thinking of doing so with new Roths instead of converting existing accounts. At least divert some of the money spent on junk and non returnable spending. -In a way its true that stacking can be like a personal Roth.

secondrepublic · May 22, 2012 3:31AM

<< Everything in the account and its gains are tax free when withdrawn down the road. >>

I disagree with that assumption. Congress created the tax laws which allows for Roth IRAs, regular IRAs, etc. They can just as easily change those laws in the future to impose a surtax on Roth withdrawals. In you look at the massive amount of money in the various Roth plans, and the ever-increasing tax "needs" of government, that seems a very likely outcome in the future. Their rationale will be that the gains were never taxed, so there is no double taxation occurring. Since no one can predict the future, I don't think it's a great idea to pay taxes now with the assumption that the tax rules will be the same in 10 or 20 years.

Overdate · May 22, 2012 8:09AM

<< Double whammy this year only: get in before the 2013 tax increases AND earn tax free gains. >>

Minority opinion here, but I don't think there will be any federal income tax increases in 2013 or in the foreseeable future. Regardless of who's elected this November, the House will block any tax increase proposals from the President or the congressional leadership. The Tea Party still wields quite a bit of clout, and tax increases don't sit well with the voters back home.

coinnerd · May 22, 2012 8:34AM

Regardless of who's elected this November, the House will block any tax increase proposals from the President or the congressional leadership

The tax increases are automatic unless congress passes a law to extend the current rates which pres can then veto. Tax increases with current administration 100%

derryb · May 22, 2012 9:32AM

<< Regardless of who's elected this November, the House will block any tax increase proposals from the President or the congressional leadership

The tax increases are automatic unless congress passes a law to extend the current rates which pres can then veto. Tax increases with current administration 100% >>

Also, lots of new taxes hidden in recent legislation that do not kick in until after 2012.

Jinx86 · May 22, 2012 9:36AM

I love reading threads like this, I am 26 years old, home owner,own farm land and rent it out, live comfortable, decent used vehicals, high credit score. Only long term investments I have are my military Thrift Savings Plan(401K) and my 401K through employer which they match $800 anually and I get to dump my flex money $1500 anually into my 401k. With the amount my employer is handing me its hard for me to judge weather or not to switch to roth.
Would I be able to just transfer over a certain amount and keep the 401K open and keep bringing in my companys contributions or do I have to close the account competely. At this age Im willing to gamble a bit but still dream of a nice retirement.

So if anyone knows of a good financial planner in Fargo, ND.....

derryb · May 22, 2012 9:37AM

<< 

<< Everything in the account and its gains are tax free when withdrawn down the road. >>

I disagree with that assumption. Congress created the tax laws which allows for Roth IRAs, regular IRAs, etc. They can just as easily change those laws in the future to impose a surtax on Roth withdrawals. In you look at the massive amount of money in the various Roth plans, and the ever-increasing tax "needs" of government, that seems a very likely outcome in the future. Their rationale will be that the gains were never taxed, so there is no double taxation occurring. Since no one can predict the future, I don't think it's a great idea to pay taxes now with the assumption that the tax rules will be the same in 10 or 20 years. >>

Statement is fact. You are assuming it will change. Your are predicting it will change yet claim no one can predict the future. Sound tax decisions are based on tax law, not predictions of future changes. The only sound prediction concerning taxes is that they will not get cheaper. Pay now or postpone? Not a tough decision.

derryb · May 22, 2012 9:41AM

<< I love reading threads like this, I am 26 years old, home owner,own farm land and rent it out, live comfortable, decent used vehicals, high credit score. Only long term investments I have are my military Thrift Savings Plan(401K) and my 401K through employer which they match $800 anually and I get to dump my flex money $1500 anually into my 401k. With the amount my employer is handing me its hard for me to judge weather or not to switch to roth.
Would I be able to just transfer over a certain amount and keep the 401K open and keep bringing in my companys contributions or do I have to close the account competely. At this age Im willing to gamble a bit but still dream of a nice retirement.
So if anyone knows of a good financial planner in Fargo, ND..... >>

Professional advice is definitly a good start. Just be sure you discuss "conversion" to Roth; "transfer" is the term used when moving to another traditional IRA.

secondrepublic · May 22, 2012 10:11AM

<< The only sound prediction concerning taxes is that they will not get cheaper. >>

That we can agree on. I just happen to think Roths won't be excluded.

guitarwes · May 22, 2012 11:36PM

<< 

<< Everything in the account and its gains are tax free when withdrawn down the road. >>

I disagree with that assumption. Congress created the tax laws which allows for Roth IRAs, regular IRAs, etc. They can just as easily change those laws in the future to impose a surtax on Roth withdrawals. In you look at the massive amount of money in the various Roth plans, and the ever-increasing tax "needs" of government, that seems a very likely outcome in the future. Their rationale will be that the gains were never taxed, so there is no double taxation occurring. Since no one can predict the future, I don't think it's a great idea to pay taxes now with the assumption that the tax rules will be the same in 10 or 20 years. >>

I agree with this completely. It's only a matter of time when the g'ment gets their hands on these "tax-free gains". Nothing is free, especially concerning the g'ment and money.

derryb · May 23, 2012 12:05AM

<< 

<< 

<< Everything in the account and its gains are tax free when withdrawn down the road. >>

I disagree with that assumption. Congress created the tax laws which allows for Roth IRAs, regular IRAs, etc. They can just as easily change those laws in the future to impose a surtax on Roth withdrawals. In you look at the massive amount of money in the various Roth plans, and the ever-increasing tax "needs" of government, that seems a very likely outcome in the future. Their rationale will be that the gains were never taxed, so there is no double taxation occurring. Since no one can predict the future, I don't think it's a great idea to pay taxes now with the assumption that the tax rules will be the same in 10 or 20 years. >>

I agree with this completely. It's only a matter of time when the g'ment gets their hands on these "tax-free gains". Nothing is free, especially concerning the g'ment and money. >>

Since no one can predict the future, better go ahead then and liquidate your gold and guns as well. Making financial decisions based on guesses and assumptions that existing rules will change is a bit risky in itself. There are no indications that the guberment is coming after your IRA other than paranoia.

Purpose of OP was to discuss the tax advantages (based on fact) of making a conversion to a ROTH before taxes increases take affect in 2013. A bit early to discuss tax consequences for 2020, especially when based on fear of what might happen.

tneig · May 23, 2012 12:06AM

I guess we shouldn't dismiss the common pattern:
A government tends to tax and tax more, and to go after every possible avenue and usage tax and funds you have, and then... start taking it.

derryb · May 23, 2012 12:09AM

<< I guess we shouldn't dismiss the common pattern:
A government tends to tax and tax more, and to go after every possible avenue and usage tax and funds you have, and then... start taking it. >>

The exact reason why one should pay taxes on something now instead of later when given the option.

guitarwes · May 23, 2012 12:13AM

True. I've been on the fence about this for some time assuming that when my 401k matures that the taxes will be higher on the withdrawals than now. But there I go assuming again.....

Edited to add: .....and you know what assuming does.

derryb · May 23, 2012 12:23AM

taxes will be higher. We already know that they are set to increase at the end of the year. There's really only two possible choices with a 401K: (1) Leave as is and face a tax bill that we KNOW will increase over time, or (2) convert to a ROTH, pay the taxes now before any further gains which under current tax law will be earned tax free. I believe that if congress goes after ROTH accounts in the future they will have already taken your gold. And if they were to go after it, they could only justify going after taxing the gains since they already taxed the contributions. In this case you will have lost nothing except tax free gains. Keep in mind that the ROTH was really created by the wealthy as a tax break to protect their future wealth creation in the account. I expect them to go after their own money in the future only after they have taken everyone else's.

guitarwes · May 23, 2012 12:27AM

Very true, they (congress) will more than likely NOT go after something they created to protect their own piggybank. They will probably claw at everything else first.

Thanks for the heads up derryb.

pf70collector · May 23, 2012 2:18AM

I think these IRAs and 401Ks will be ripe for the picking from the Fed Gov't. Roosevelt did it with Gold. To the Feds these IRAs are just like gold. They have been taking from the SS Trust Fund for decades. This will be a new source of funding for them. IRAs will be tax free if only placed in Treasuries. They will never stop spending until they run out of available resources. This is there mandate. Even when facing a fiscal cliff they refuse to stop spending. Government has no accountability, as long as its other people's money who cares.

jmski52 · May 23, 2012 2:23AM

I think these IRAs and 401Ks will be ripe for the picking from the Fed Gov't. Roosevelt did it with Gold. They have been taking from the SS Trust Fund for decades. This will be a new source of funding for them. IRAs will be tax free if only placed in Treasuries. They will never stop spending until they run out of available resources. This is there mandate. Even when facing a fiscal cliff they refuse to stop spending.

I think this is a major consideration - with our financial system being tied in so closely with our taxation system. They've also shown quite clearly that they will do anything they please, any time they want, until stopped.

DrBuster · May 23, 2012 2:25AM

<< I think these IRAs and 401Ks will be ripe for the picking from the Fed Gov't. Roosevelt did it with Gold. To the Feds these IRAs are just like gold. They have been taking from the SS Trust Fund for decades. This will be a new source of funding for them. IRAs will be tax free if only placed in Treasuries. They will never stop spending until they run out of available resources. This is there mandate. Even when facing a fiscal cliff they refuse to stop spending. Government has no accountability, as long as its other people's money who cares. >>

I thought I've been reading the chatter that the likely hit will be that 401ks, iras, roths, etc will be forced to include some percentage of governement bonds. No exceptions. No extra tax, just forced investment into those items, thus increasing the DC take. 401QE essentially.

derryb · May 23, 2012 2:55AM

chatter is that account holders that do not specify specific investments with their retirement accounts will get defaulted to treasury bonds. As we are about to find out from the supremes (health care reform), citizens cannot be forced by Washington to buy anything with what they have left after taxes.

DrBuster · May 23, 2012 3:31AM

<< chatter is that account holders that do not specify specific investments with their retirement accounts will get defaulted to treasury bonds. As we are about to find out from the supremes (health care reform), citizens cannot be forced by Washington to buy anything with what they have left after taxes. >>

I totally want to agree with that, but the SC doesn't have me feeling 100% about what they'll rule on that nonsense.

Thinking about converting funds from a traditional IRA to a Roth IRA?

Comments