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Hey foolmeonce!

I concur with your thinking about future congressional tax eaters. But, in addition to future problems, I think there are enough with the present conversions to be wary!

I posted this note on the thirdage money forum since it applies primarily to old folks, but some of the younger crowd may be interested!


People with large IRA balances and into or close to retirement should review the following:

1. The extra income could push you into a higher tax bracket or cause you to lose tax breaks for some itemized deductions.

2. In addition, the annual inclusion of 25% of your Roth roll-over income for four years may also increase taxes on your Social Security benefits!

3. You must also consider that your state and city taxes will also rise unless local taxers are asleep.

4. Even spread out over four (4) years, the drain of paying all these taxes may be severe.

5. Taxes for the Roth roll-over, must be paid from a source, other than the roll over monies. Otherwise, the compounding period in the Roth would be too long and you lose any advantage. In addition, if you withdraw money from your IRA to pay these taxes you will be assessed an early withdrawal penalty! These could be concerns for older investors!

6. If you take money from another investment (I assume it's invested!) to pay the roll-over tax, you lose dividends, interest etc., from that investment! You also get to pay broker's fees - TWICE, once when you sell to roll over (broker's don't transfer securities, only money) your regular IRA and again when you purchase securities for your Roth IRA.

7. An overhaul of the tax system could have a major effect on many investments! Those thinking about opening a Roth IRA may want to wait until tax reform proposals firm up! Investors may lose the promised benefits from Roth IRAs since investment income in the current tax reform proposals is exempted from taxes.

8. Also, if your plans include buying a home, or condo in a retirement community or buying a vacation home, you must consider if you can afford monthly mortgage payments, since they may no longer be deductible. If the mortgage deduction remains under flat-tax proposals, homeowners might find it worth less. A National Sales Tax of course precludes tax deductions!

9. Some question whether to take up the government on an offer to convert an existing IRA to a Roth account. The downside is that you'll have to pay tax now on the existing account's taxable balance, although no penalty will be assessed for such a switch. But by getting the tax out of the way, you can collect all your IRA retirement income tax-free. For some, this choice is moot since it's available only to single or married people with no more than $100,000 of adjusted gross income.

10. Another difficulty in determining whether to convert to a Roth IRA is predicting future tax changes! Are the President or congress thru defining taxable income? Those old enough to remember, know that Social Security benefits were untaxed until Reagan decided to grab 50% of the distributions, now Clinton raised the ante to 85%. Originally, IRA deductions were deductible! Not now, except for low income wage earners.
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