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|Subject: Roth conversion complicated by other factors||Date: 2/24/2001 9:29 AM|
|Author: hbogart||Number: 28084 of 82226|
Long rambly post (I first tried this one on the LBYM board where I tend to hang out and was referred here) --
I am 32; DH is nearly 50. This year, our AGI is under the limit for being able to convert a traditional IRA to a Roth. Next year, and for the foreseeable future, it won't be.
We have 2 kids (my stepkids) in college. We and their mother pay their way, beyond whatever aid they qualify for, which is mostly unsubsidized loans. This year, one kid qualifies for the Hope Credit and the other for Lifetime learning. We have to claim them to get these; their mom files married-filing-separately.
I have a trad IRA worth about $8k. I am wanting to convert it. The net cost of doing this is almost $3k -- $2.3 in taxes (28% bracket), $460 in lost educational credits, plus -- here's where things get still more dicey -- in order to do the conversion and my regular Y2K Roth contribution (that I haven't done yet...) I need to borrow $2k from my 403b account at 7.9%. I do understand that I am borrowing pre-tax money, paying it back with post-tax.
I'm basically inclined to proceed with this in spite of the cost. I figure borrowing against the 403b as a low-risk strategy because I could always yank the principal (i.e. Y2K contribution) back out of the Roth -- I will keep it "in the bank," rather than stocks, 'til the loan is paid off -- to pay off the loan. Also, I expect to be able to pay that loan off very quickly (see below).
An important point here is that we LBOM...not as much as we should, perhaps, but our net worth is increasing, not decreasing. We do have some consumer debt...a car loan about $9k at 6.25% (I had just started paying extra on this, but now have temporarily quit due to the Roth issues, but will start again ASAP). Also, I fully fund my 403b, and DH is in a defined-benefit pension plan and also contributes about 2/3 of his allowable extra amount to a 403b (yes, that needs to go up to 100%...). Also, I have taken on some extra projects at work that will result in my net pay over the summer months being about double what it usually is, for 3 months (total take-home bonus=about $7k)...but I cannot have that money until June/July/August. This is why the 403b loan should be a very short-term thing.
DH, himself somewhat of a "grasshopper" rather than an "ant" (as I tend to be) is worried about what this is costing us...it is a lot, even more than converting this amount "should" cost because of the lost educational credits and the interest charges. But I see it as good long-term planning...not just for retirement but potentially as estate planning. I fear if we wait
'til our income again drops below the allowable AGI to convert, the value of the IRA will be much larger and thus, conversion will be even more costly. But he makes the point that by the time I am 59&1/2 he will be 75 or so and that he won't ever "benefit" from this investment...
I should perhaps mention that investing the capital that we will otherwise pay to cover the costs of the conversion in a separate account is out of the question...I will be able to persuade DH that we have to pay the feds but not that we must set that money aside elsewhere...this is not rational, perhaps, but it is true...
Thoughts? Thanks in advance,
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