To Roth or not to Roth?

Waterbury Republican-American ^ | January 24, 2010 | Eileen Ambrose

[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 Once in the Roth, though, your money and any earnings can be withdrawn tax-free in retirement.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.

[Seven plus One]

I think you would see the same type of voter backlash we have with the attempted health care grab.

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.

[Stegall Tx]

I think the most likely scenario is that they will take away the ability to leave a Roth to your heirs tax-free, so it will be in your best interest to try to die without a Roth. However, the best strategy for me (mid-40’s) is to go with the Roth, convert as much of my traditional retirement money into Roths as I can afford, and vote for conservative candidates.

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.

[SAJ]

You may be right as to backlash, but the current group of thieves are kamikaze: with them, it's 'damn the torpedoes'...and there are probably enough 'fiscally responsible' (read: greedy) 'Pubbies to go along with them.

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".

[Darth Reardon]

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).

[EVO X]

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),

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.

[justlurking]

First chance they can, if they think they can get away with it.

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.

[Graybeard58]

I prefer Diana Roth.

[Fireone]

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.

[expatpat]

It's a tough call.

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.

[1st I.D Vet]

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.

[Alberta's Child]

Right. I should point out that my previous post was aimed at a Roth conversion from a traditional IRA, and not Roth IRAs in general.

[Alberta's Child]

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.

[SAJ]

Well, it's not moot quite yet. When the Regress put their confiscationist hand in the pie, though, it will be.

Not joking at all about starting to convert dollar assets to other currencies, either.