No. of Recommendations: 8
All of the following is my rendition of TMFPixy's post...

  The tables should be much more readable... but I'm not sure if I got 
the labels on the columns of the last two tables entirely correct.
It should be easy for TMFPixy to correct any errors there (the rest of
the text should be unchanged)

  Off to write my response... ;)

ps.  (this is my first "preserved formatting" post, while I've observed
what they look like when other's do them I'm not sure I have all the
tricks learned yet, so i really hope this works *=).
Greetings, All.

  The following is excerpted from a booklet I am writing for my day job
on various provisions of the Taxpayer Relief Act of 1997.  It deals
with the Roth IRA from the standpoint of contributions and rollovers of
traditional IRAs.  I provide it for your information and reading pleasure.
Comments are welcome.


  The Roth IRA introduced by TRA 97 provides a new, powerful means to
save for retirement and accumulate wealth.  It's unlike any savings
tool with which we're familiar.  We can't get a tax deduction for
making a contribution to it, but after the Roth IRA is established
all contributions and earnings may be withdrawn free of taxes provided
we meet a few relatively simple conditions.  Unlike traditional IRAs,
no withdrawals are mandatory, and should we die our heirs will receive
the entire balance tax-free.  Additionally, provided our AGI is no more
than $100,000 and we pay all taxes previously deferred, we may convert
existing traditional IRAs to a Roth IRA.  On conversion, these IRAs will
also enjoy the tax-free benefits provided by the Roth.

  Despite the potential for tax-free withdrawals, the Roth IRA may not be
the best retirement accumulation tool for everyone.  Each of us must look
at our own situation to determine what course of action is best for us.
Our age, the length of time before we need the money, our tax rates today
versus those of tomorrow, and our net worth all play a part in deciding
how to use this new option.

Contribution Comparisons.
  A traditional IRA is "back-loaded."  This means that, subject to
limits, the contribution is untaxed when it enters the IRA, but it
and all earnings thereon will be taxed on withdrawal.  A Roth IRA is
"front-loaded," which means contributions create no deduction in today's
taxes, but on withdrawal they and all earnings are received free of tax.
Thus, our problem becomes one of comparing the "front-loaded" Roth IRA
to the "back-loaded" traditional IRA.  Should we pay taxes at today's
rates to receive tax-free proceeds tomorrow (Roth IRA)? Or should we
take today's tax deduction and postpone taxes until tomorrow when we
may be in a lower tax bracket (traditional IRA)?

To examine this issue, we need to look at two scenarios.

Scenario 1.
  John makes a tax-deductible contribution of $2,000 per year to a
traditional IRA. He is considering the new Roth IRA, but must maintain
the same net income he has today using the traditional IRA.  John is
in the 28% marginal tax bracket, which means he may only contribute
$1,440 to a Roth IRA to keep his net income the same as it is by using
the traditional IRA.  He wonders how he would fare in the Roth IRA as
compared to the traditional IRA over time, assuming the latter will be
taxed at the same marginal rate in the future.  He also wonders what the
comparison would be if his marginal tax rate decreases when he begins
IRA withdrawals. Both investments will earn a 9% annual rate of return.

Table 1 reveals that if John's tax rate remains the same, the Roth IRA and
the traditional IRA will provide the same net income after consideration of
income taxes.  However, if John's marginal tax rate declines at withdrawal,
as it does for many retirees, then he is better off in the traditional IRA.

Table 1:
      Annual Contributions to Roth IRA
  As Compared to Traditional IRA (After Taxes)

             |       Traditional
             | Before    After    After
Year   Roth  |   Tax      28%      15%
5       9394 |  13047     9394    11090
10     23847 |  33121    23847    28152
15     46085 |  64007    46085    54406
20     80301 | 111529    80301    94800
25    132947 | 184648   132947   156951
30    213948 | 297150   213948   252578
35    338580 | 470249   338580   399712

Scenario 2.
  Assume John's circumstances are the same as before except that he will
deposit $2,000 annually into the Roth IRA.  To do so, he will forego
contributions he was making to a regular investment account that has
an after-tax return of 8.244% per year.  (Note: The total return on
this account is 9%, of which 30% comes from taxable dividends and 70%
comes from long term capital appreciation.)  For fairness, the lost
principal and growth on this additional $560 deposit must be added to
traditional IRA proceeds because the foregone investment would have
been available for withdrawal in later years.  Assume growth in this
investment account will be taxed at a long-term capital gain rate of
20% on withdrawal for a taxpayer in the 28% marginal bracket and at 10%
for one in the 15% bracket.

Table 2 shows the results of this approach.

Table 2:

      $2,000 Annual Contribution to Roth IRA As Compared to
  Traditional IRA & Taxable Investment Account (After Taxes)

     |        |       28% Bracket     |      15% Bracket
     |        |   Ded     Inv    IRA  |  Ded     Inv     IRA
     |        |   IRA    Acct     &   |  IRA    Acct      &
     |        |  After   After   Inv  | After   After    Inv
Year |  Roth  |   Tax     Tax   Total |  Tax     Tax    Total
5    |  13047 |   9394   2859   12253 | 11090    3216   14306
10   |  33121 |  23847   7107   30954 | 28152    7995   36148
15   |  64007 |  46085  13420   59505 | 54406   15097   69503
20   | 111529 |  80301  22800  103101 | 94800   25651  120450
25   | 184648 | 132947  36740  169687 | 156951  41333  198284
30   | 297150 | 213948  57455  271403 | 252578  64637  317215
35   | 470249 | 338580  88237  426816 | 399712  99267  498979

  Notice that if John remains in the 28% marginal tax bracket when he
takes his savings, then in every time period the Roth IRA will provide a
greater income than the combination of the traditional IRA and the taxable
investment account after both have been taxed.  However, if John's tax
rate declines in retirement, the Roth IRA is definitely inferior to
the traditional IRA when the latter is used in concert with the taxable
investment account.

  Based on 1997 marginal tax brackets, taxpayers in the top three tax
rates (i.e., 31%, 36%, and 39.6%) are ineligible for a tax deductible
traditional IRA.  Those in the 39.6% bracket are also ineligible
for a contributory Roth IRA.  For eligible 31% and 36% taxpayers, the
contributory Roth IRA is a better alternative than is the nondeductible
regular IRA.  Neither results in a current tax deduction, but all Roth
proceeds are untaxed on withdrawal.  In the nondeductible traditional
IRA, earnings are subject to taxation when withdrawn.  For the 39.6%
taxpayer, the only IRA alternative is the nondeductible traditional IRA.

Conclusions Regarding IRA Contributions.
  In choosing between a tax deductible traditional IRA and a Roth IRA,
our marginal tax rate today versus that of tomorrow is important.
If the tax rate declines when the money is withdrawn, those who end
up in a 15% tax bracket will not benefit from Roth IRA contributions.
If the tax rate stays the same in retirement, neither choice has
an income tax advantage over the other during the owner's lifetime.
(Note: Because the Roth IRA passes tax free to heirs at death, it has the
advantage from that standpoint.) To beat the traditional deductible IRA,
an after-tax contribution to a Roth IRA must be exactly equal in dollars
to that made to the traditional IRA.

Traditional IRA Conversions to a Roth IRA.
  TRA 97 allows taxpayers to convert traditional IRAs to Roth IRAs provided
their AGI is under $100,000 in the year of conversion.  (Note: Based
on 1997 tax brackets, this means only those with a 15% or 28% marginal
rate are eligible for a Roth IRA conversion.)  No penalty applies, but
ordinary income taxes must be paid on previously untaxed IRA proceeds.
If the conversion occurs in 1998, the income from the IRA must be spread
equally over four years for taxation.  Conversions made in 1999 or later
will be fully taxed in the year they occur.  If money is withdrawn from
the converted IRA to pay taxes, the 10% early withdrawal penalty will
apply for those younger than age 59 ½.

Scenario 3.
  Jane, who is younger than age 59 ½, has $50,000 in a previously untaxed
IRA.  She wants to rollover that IRA to a Roth IRA.  Her return in either
the Roth IRA or the traditional IRA will be 9% per year.  Jane cannot
afford to pay the income taxes due on the conversion, so she will keep
enough money from the rollover to pay all taxes due in 1998 and later
years.  She wants to know if conversion will result in a better income
for her in retirement.

  In this situation, the first problem is to determine how much she must
withdraw from the traditional IRA to pay her taxes and the 10% penalty
that will be due on the entire withdrawal because she is younger than age
59 ½.  This can be done by using the formula W = T + 0.1W in which W is
the total amount of withdrawal and T is the total amount of taxes due on
the value of the converted IRA.  The formula can be reduced to 0.9W = T.

  If Jane is in the 15% marginal bracket and if her IRA is worth $50,000,
then on conversion she will owe $$7,500 in ordinary income taxes.

That means:

  0.9W = T
  0.9W = $7,500
  W = $7,500 / 0.9 = $8,333

  Jane can then withdraw $8,333 from her traditional IRA, convert the
remainder ($41,677) to the Roth IRA, and have enough to pay her ordinary
taxes of $1,875 over each of the next four years (a total of $7,500)
plus her $833 early withdrawal penalty in 1998.  The $833 is 10% of the
total amount withdrawn from the converted IRA.  For the purposes of this
illustration, we will ignore any earnings she may receive on the amount
she has retained to pay future taxes on the rollover.

  The procedure described above was used to calculate the results of
converting her IRA assuming she was in the 15%, 28%, or 31% tax bracket
in 1998.  After-tax comparisons of the Roth IRA to the traditional
IRA for each marginal tax rate are at Table 3.  In every case, the
Roth IRA fails to match the after-tax results of the traditional IRA.
This failure is due to the lost investment opportunity on the money she
withdrew from the converted IRA to pay her taxes on the conversion.

Table 3:
           Roth IRA Conversions
 Taxes and Penalty Paid from Converted IRA

     |   15% Bracket   |  28% Bracket   |  31% Bracket
     |            Ded  |          Ded   |          Ded
     |            IRA  |          IRA   |          IRA
     |           after |         after  |         after
Year |  Roth      Tax  |  Roth    Tax   |  Roth    Tax
5    |  64110    65392 |  52996   55390 |  50433   53083
10   |  98641   100613 |  81541   85225 |  77597   81674
15   | 151771   154806 | 125462  131129 | 119393  125666
20   | 233519   238187 | 193038  201759 | 183701  193352
25   | 359298   366481 | 297013  310431 | 282647  297496
30   | 552824   563876 | 456992  477636 | 434888  457735
35   | 850589   867594 | 703139  734903 | 669129  704282

Scenario 4.
  Jane is in the 28% tax bracket and has a $50,000 traditional IRA she
wants to convert to a Roth IRA.  She will pay all taxes due on the
conversion from other assets. To do so, she will withdraw the taxes due
each year from a regular investment account.  The account has an after-tax
return of 8.244% per year.  (Note: The total return on this account is 9%,
of which 30% comes from taxable dividends and 70% comes from long term
capital appreciation.) For fairness, the lost principal and growth on
her withdrawals must be added to the traditional IRA proceeds because
had the money not been used for the Roth IRA, the investment would
have been grown through the years and been available for withdrawal
in retirement.  Assume growth in this investment account will be taxed
at a long-term capital gain rate of 20% on withdrawal for a taxpayer
in the 28% marginal bracket and at 10% for one in the 15% bracket.
Table 4 shows the after-tax results of this approach for Jane if she
remains in her present tax bracket of 28% or falls to a 15%
marginal tax rate at the time of the withdrawal.

Table 4:
      Roth IRA Conversions
   Taxes and Penalty Paid from Taxable Investment Account

              |      28% Bracket      |      15% Bracket
              |  Ded     Inv     IRA  |   Ded    Inv     IRA
              |  IRA     Acct     &   |   IRA    Acct     &
              | After   After    Inv  |  After  After    Inv
Year    Roth  |  Tax     Tax    Total |   Tax    Tax    Total
5       76931 |  55390  14837   70227 |  65392  16691   82083
10     118368 |  85225  16060  101285 | 100613  18067  118680
15     182124 | 131129  17384  148513 | 154806  19557  174362
20     280221 | 201759  18817  220576 | 238187  21169  259356
25     431154 | 310431  20368  330799 | 366481  22914  389395
30     663384 | 477636  22047  499684 | 563876  24803  588679
35    1020698 | 734903  23865  758768 | 867594  26848  894441

  Table 4 reveals that if Jane remains in the 28% tax bracket at withdrawal,
the use of other assets to pay the tax due on the conversion of her old
IRA makes the Roth IRA a clear winner.  The total of her traditional
IRA and her investment account after taxes is less than the total for
the Roth IRA.  If her marginal tax rate drops to 15% when she begins
withdrawal, the traditional IRA is best when those withdrawals start
within 10 years.  At 10 years, the traditional IRA has a slight edge
over the Roth IRA.  For holding periods longer than 10 years, the Roth
IRA is a better alternative.

Conclusions Regarding Roth IRA Conversions.
  When funds are taken from the converted IRA to pay income tax due on the
conversion, the Roth IRA will be an inferior option to the traditional IRA.
This holds especially true if the withdrawal to pay those taxes also
results in an early withdrawal penalty.  When taxes due on the conversion
are taken from other taxable assets, the Roth IRA is a more attractive
option.  For those who remain in the same marginal tax rate at the time
of withdrawal, the Roth IRA is a clear winner.  For those who drop to a
lower tax bracket at withdrawal, the Roth IRA must be held for more than
10 years to beat the traditional IRA.



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