Posted on 12/03/2017 5:28:23 AM PST by DIRTYSECRET
The folks at Fidelity advocate it but author Ric Edelman doesn't. Pay taxes now for none later-especially with the good economic news. As much as possible at 39% tax rate now or a measured amount yearly at a lower(12%?)rate? Trumps lower rate goes up to $90k which means we can all transfer $30-60k yearly. Tough call my friends. Talk to me.
The Roth idea is go ahead and pay taxes on the 100k you put in and skip the taxes on the 1mil you take out.
Ping for expertise.
I couldn't afford to pay the taxes on the transfer. So we started another plan such that new savings went into the Roth.
I follow Ric Edelman and I think his advice is spot-on.
So the trick is to get it up to $2 million. Mandatory withdrawal at age 70+ doesn’t apply to Roths-right? I’d rather keep my money there where it continues to grow.
I recommend not transferring an existing IRA but funding a new Roth if your income allows.
I did a transfer back during the Clinton years when the stock market was high and paid the tax. Well, of course the markets corrected and I lost a huge amount from the Roth.
The markets are high right now and one imagines them higher but, things don’t always work out. The government got my taxes (which is one of the reasons Clinton can claim he balance the budget. Newt is the other reason.) and I got a loss I could not book against my tax bill. YMMV
My own view is that a bird in the hand is worth two in the bush. The government doesn’t keep its word.
New Roth=No way. I quit working at age 62. I would never compare my work experience to the Holocaust but the one similarity remains: Never Again. So go to work making $6500/yr + up to $15.7k(ssi penalties)? Doable but then I prefer lost luggage.
The money is there for the left’s taking. The good news is there are too many of us, including lefties who do the right thing with our income. I don’t want to be the one to die with the most marbles. I just want to keep winning without working. Sounds fair does’t it?
With the tax rates about to drop for most of us? I’d look very carefully at the House and Senate versions, do a pro-forma return for this year and next, and then decide whether or not to wait for 2018.
Also note if this is your first Roth account ever, you start a five year clock ticking. Any withdrawal prior to the 5 years is subject to a penalty (but not tax). For that reason, you might want to start one this year with a small amount, waiting for the drop in the tax rate.
Then again, if your taxable income is low, say because of a non-taxable pension, then transfer up to your Standard Deduction + Personal Exemption, essentially tax free. More if the rate exercise above shows it to be a wash.
Good for you being able to quit at 62. I did add, “YMMV”.
Roth is just a current government rule, subject to change at any time. How do you know you won’t pay taxes up front and then end up paying them again when you withdraw? And the way things are going in DC, I’d say that’s a virtual guarantee.
Marking for later review. Like to see what FReepers have to say.
My rule of thumb:
If tax rate is lower when you retire, then regular. It same then Roth. If not sure then both. If want to leave to kids, then probably Roth. If leaving to charity then regular.
During the 2 year period when you could move any amount of money from a regular IRA into a Roth, I moved a big chunk of my IRA money into a Roth and took the tax hit at the time. Since then, my advice is telling me I can only put $6500 per year into a Roth. I’m puzzled by your $30K-60K figure. Under what circumstances can you do that?
Not having to withdraw from a Roth at age 70 1/2 is a huge advantage in retirement, as is the nontaxable feature on gains.
Your tax rate may not be lower in retirement, with the changes in the new tax laws it will be harder for some people to itemize deductions.
As long as they don’t mess with a Roth.
Contribute to the max of your companies match and max out Roth contributions if you can.
Suppose you are contributing $10,000 per year to the IRA. Would you rather have the full $10,000 pre-tax (traditional IRA) compounding for you over 30 years or the $6,000 after-tax (Roth IRA) compounding for you over 30 years? Under traditional, you are required to take money out starting at 70-1/2 years of age and follow the government actuarial table each year for your required minimum withsdrawal. Your first withdrawal will be 3.6% of your savings (1/27.4).
Here’s a scenario: assume an annual return of 6%, you contribute $10,000 at the beginning of every year, you invest for 30 years, and you have an average tax rate (not marginal) of 40% state and federal, You will have at the end of 30 years:
Traditional IRA — $838k
Roth IRA — $503k
I’d rather have the extra $335k in MY account when I retire rather than give it to the government as I earn it.
The Roth, of course, continues to grow tax-free while you are retired because you paid the tax when you earned the money. If you are able to live off the income, you can leave the principal untapped. If you do not spend all of your conventional IRA required distributions, you will put that amount into taxable investment.
A lot depends on your tax bracket when you retire, how long you will live after retiring, and if you need to draw down the IRA to live or if you are able to live on the generated income stream.
There are a lot of online calculators, but they often do not have enough variables or inputs to accurately model the scenarios.
Whatever you do, be SURE to factor in inflation in your planning. This I should probably more important than the Roth vs Traditional decision. If you think you will get an 8% annual return on your investments (your “nominal” return) and inflation is at 3%, your “real” return is only 5%. People underestimate the impact of inflation on their retirement income. This is the single biggest flaw in most people’s retirement planning. You can model this two ways:
1. Escalate your current expenses by 3% per year (or whatever you think inflation will be) and use the nominal rate of return to determine your savings.
2. Use the real rate of return and your estimated retirement expenses in today’s dollars).
Lastly, don’t use a single estimate of your retirement savings. You want to simulate your savings by running thousands of models and looking at the resulting probabilities of outcomes. Monte Carlo Simulation is the tool for this. Check out portfoliovisualizer.com.
No. Just no.
Leave it in the IRA and start a new Roth account. The Roth is only worth anything after you retire because it is funded with post-tax money.
I have no confidence that 20 years from now, there will not be a "rich person" assessment/tax on that Roth money.
So to that, I am not doing a conversion.
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