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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75839  
Subject: Re: Roth Conversion? Date: 1/4/1998 11:17 AM
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Greetings, FoolMeOnce, and welcome.

<<I would like to provide for your consideration, a few comments regarding the potential conversion of a traditional to the new Roth IRA. Based on the conventional criteria being bandied about regarding time horizon and future tax rates, I would probably have to consider myself a prime candidate for conversion. I find myself extremely reluctant to do so however.

Years ago, I started a traditional IRA. It was not a decision I entered into lightly. The IRA was a new and previously unheard of type of program. After performing a great deal of due diligence in evaluating all aspects of the program and how they related to my personal financial situation and plans for the future, I took the plunge. Had I known that within the short span of a few years, congress would make modifications to the program which, for me, effectively eliminated the deductability of contributions, I might have reconsidered the advisability of my involvement. The deductability of contributions was after all, the major inducement for participation in the program and was the hook that conviced me and many others to become involved. Since congress saw fit to leave untouched the considerable penalty for early withdrawals (bless their hearts) I have retained my IRA and in fact make regular (nondeductable) contributions.

It has not gone unnoticed that for all converted accounts, taxes will be collected on a pot of money which otherwise would not become taxable until some distant future time. Perhaps it would not be overly cynical to suspect that the tax eaters in D.C. would be inexorably drawn to a much larger (and previously untaxed) pot of money sitting in all those Roth IRAs. It is also very easy to visualize a situation brought on by some budget crisis during which the considerable benefits of the Roth IRA would be curtailed. Everyone is talking about how the Roth IRA is the greatest thing since sliced bread. (Some would say too good to be true). Everyone is sharpening their pencils, reading the tax manuals and crunching the numbers. But all of this activity is being carried out with the unstated assumption that the Roth IRA will always exist in its current state. It ain't necessarily so. This approach may be hazardous to your wealth. Your Government asks you to make long term commitments when you enter these programs. Your elected represenatives however, operate with a considerably shorter time perspective.

Every time I have ever lost money, it has been when I have lost personal control. Years downstream, it may be that the greatest benefit of the Roth IRA is that it diverted the attention of the tax eaters from the traditional IRA and which would therefore have become a more dependable (stable) vehicle for the planned accummulation of wealth. As for now, I think I will stand pat. For me, it is a case of "once bitten, twice shy" Or, as I have previously stated, you can....FoolMeOnce>>

Super post! I would quibble with your thoughts only on some minor issues. I for one have said the Roth probably will be gone in five years. Like you, I believe the money-starved ghouls in our nation's capital won't abide untaxed honey pots for long. Unlike you, though, I don't think they will impose new taxes for those Roth IRA already established at the time the present law changes. Instead, the lawmakers will simply prohibit the addition of new deposits and the creation of new accounts. Those who take advantage now will be grandfathered under the provisions of today's law but will be precluded from adding new money to those accounts. That's just one Fool's opinion FWIW. Congress, of course, can do anything it desires. It's just that I believe if they take away existing accounts there will be rioting in the streets and erstwhile leaders swinging in effigy from lamp posts. For those who wish to stay in office, taking the benefit away in total would be political suicide.

Look at today's IRA. It began in 1975 at 15% of compensation limited to a maximum of $1.5K, and if you were covered at all under an employer's plan you couldn't play. In 1982 the limit was increased to 100% of compensation up to a maximum of $2K regardless of retirement plan coverage through work. In 1987, the deductibility was changed based on active participation in an employer's plan, Adjusted Gross Income, and filing status. So the rules changed, but those rules were NOT applied retroactively. The changes were applied against future deposits.

Will the rules change for the Roth? IMHO, yes. The Congress giveth and the Congress taketh away. The Roth as it is now probably won't last long. But for those who use it today, the rules probably won't change for the account they establish today save the ability to make future contributions. Those who don't use it today will probably see the opportunity to do so vanish forever. Mama didn't promise us a rose garden and life comes without guarantees.

Ya makes your choices and ya lives with the results.

Regards.....Pixy
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