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I'm beginning to go dizzy trying to figure out If I should close my traditional IRA'S and pay the tax and take my chances in cash accounts. Here's my dilema all my income when I withdraw it is taxed as regular income so I lose the low rate for capital gains and can not use an occassional taxable loss to offset a gain. 2010 has been a good year of gains for me thanks to AAPL, F, MCD, D, and others. Furthermore I need the income at least quarterly. If I'd cash out everything in 2010 the tax rate would be 36% as over $200 K would be withdrawn but if gains in the future are taxed at 15 to 20% every year in the future I would be saving taxes. Of course 36% on the one time cancelling of my IRA's would be a lot. In the future though paying 15 % on my gains looks very appealing.
ANY HELP OUT THERE??
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If you cashed out you would also be losing the tax deferment on the IRA. Personally, I would not cash out.
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If you are willing to take the tax hit now, why not do a Roth Convertion. The biggest advantage would be not taxes on income or capital gains from a Roth IRA. Another advantage this year is the ability to split the tax burden over a 2 year period.

Talk to an accountant or tax professional about this. I believe he will agree this would be better than having the investments in a taxable account.

Gene
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What would your tax be if you just took out what you needed each year to live on?

With 200k presumably in the IRA, I'd hazard a guess that you're looking at the 15% to 25% tax rate max. So why would you want to pay 36% now???

If you want to get some more out, I'd suggest taking just enough to keep you in your current tax bracket. That way you're not increasing your taxes unnecessarily.

And don't forget that the 15% rate on capital gains is set to expire in a couple of weeks. It goes back to 20% on Jan 1, 2011, unless Congress decides to extend this portion of the Bush tax cuts.

--Peter
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Here's my dilema all my income when I withdraw it is taxed as regular income so I lose the low rate for capital gains and can not use an occassional taxable loss to offset a gain.

You seem to be forgetting that you already took advantage of the tax break when you contributed to the account and that are continuing to take advantage of the continued tax deferral as you sell gainers for any reason (including mergers, acquistions, takeovers, etc.), not just because you need to take the income.

If I'd cash out everything in 2010 the tax rate would be 36% as over $200 K would be withdrawn

Actually for 2010, the federal rate would be 35%, not 36%. And assuming that you are not filing Married, Separate, you would only be paying 35% on the taxable income above $373,650. That means if your current balance on your IRA is $200k, you would have to have other taxable income (after considering deductions & exemptions) of more than $173,650 to pay any tax at 35%.

but if gains in the future are taxed at 15 to 20% every year in the future I would be saving taxes.

Only if capital gains rates remain lower than ordinary income rates. They haven't always been, and there have been several proposals to tax capital gains at ordinary income rates.

And at a 36% tax rate, even if you assume that your tax rate will be going up to 28% in future years, you are still paying 8% more now than you would spend then.

Additionally, not all income is taxed at your marginal rate - at a marginal rate of 28%, your average tax rate may only be 18%.

Now, let's run some numbers.....

Let's say that of your $200k withdrawal, $100k of it gets taxed at the 35% rate, so you end up with $65k after your taxes are paid. Let's further assume that you subsequently have $35k in gains (a 53.84% gain) and those gains are taxed at 20%, or $7k. So your total tax bill for this would be $42k, and you would end up with $93k in after-tax income.

Now, if you had left the $100k in the IRA, and it had grown at the same 53.84% rate, you would have $153.84k. Let's say that all of this income gets taxed at a 36% rate (unlikely because of inflation indexing and the bracket structure, but for a worst-case scenario, we can use that assumption) That would mean that your tax bill on the IRA would be $55.38k, and you would end up with $100.46k in after-tax income, or $7.46k more than if you paid the taxes now and then paid the 'lower' rate later.

Yes, you would end up paying more in total taxes, but you would also net more because you aren't depleting your capital now in order to pay taxes before you have to.

AJ
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You avoided income tax on the money in your IRAs when you put it in. Tax has to be paid when it is taken out.

You talk about gains on APPL, etc. If these gains are in an IRA, you can sell those stocks and invest in others things within your IRA. Just about any bank or brokerage will be happy to "help" you. I suggest brokerages like Schwab or Vanguard - but others will have different recommendations.

Since you say you need funds from your IRA, I am going to assume you plan on spending this money in retirement as opposed to gifting it after your death to someone. That being the case, you should look carefully at the numbers before making a Roth conversion. Yes the funds from the Roth are tax free when withdrawn, but you will have a big tax hit up front and it takes a long time to earn that back. The tax hit once you stop earning money will be much lower - assuming you take funds out over a period of 10 or 20 years.

Gordon
Atlanta
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Moving to a taxable account is wrong on so many levels it is hard to know where to start.

A few points not mentioned so far;

A huge advantage of either the traditional IRA or the Roth is that you get to defer the taxes until you actually withdraw it. This means that if you sell stock "A" to buy stock "B" in one of these account that you don't have to pay any taxes then. Eventually you might sell stock "B" to buy "C", then sell it to buy "D" and so on. If you will be doing this a lot then the tax deferral would eventually be worth more than getting the lower tax rate on future sales.

You also have to look at your future tax rates to see what the best deal choice is. Many people find that as they are retired longer that either they spend down their money and end up in a lower tax bracket, or they have a pension that is not inflation adjusted so it becomes worth less and puts them into a lower tax bracket. With the standard deduction, exemptions, and the low tax rate on the first chunk of taxable income, you really want to have around $40K or so in taxable income(possibly more if you are married) to take advantage of these low rate on the first part of you income each year.

Greg
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<<<ANY HELP OUT THERE??>>>

mollycat

Certainly, what you describe can seem overwhelming when trying to figure out what to do.

Here's what I did.

1. I used sales in the taxable account for living expenses for 3 years ... until RMDs for the tIRA begin in 2011. Hubby received SS benefits but no pension during that time. There is no pension per se.

2. Also during the time before RMDs, I converted modest amounts from tIRA to Roth. The $$ amount of conversion was determined by using "what if" in Turbo Tax.

3. The goal? To stay within the 15% tax bracket .... while drawing SS benefit, generating stock sales for living expenses (cap gains generated, too), and filling up the 15% bracket with conversions to Roth. I didn't try to be exact about it. Just wanted to be in the ballpark.

4. In 2011 RMDs begin. The picture changes a bit. Those RMDs are fully taxable (as were the conversions previously). But, the RMDs are required now at a designated amount. Hubby still on SS and I'm also on SS now. Taken together? That puts us into the 25% bracket. OK. But it's still not enough to meet expenses.

5. So, do I take more than the RMD from the IRA? Or do some selling in the taxable account? Answer. Use the taxable account to generate the additional $$ needed - that generates cap gains.

6. As it turns out? RMDs $$ withdrawal vs taxable account $$ sales? each year will about 60% vs 40%. Nice to know that up front. The plan.

7. As you keep working with the #s and gain more understanding of taxes and your own situation? Gradually, it will begin to make more sense, and you can begin to develop a plan.

8. Turbo Tax has a slick tool called "what if". First I had to learn how to use Turbo Tax. You can do that, too. (For instance, buy the 2009 program and just plug your #s taken right from your actual tax return into the program using the override function, if necessary.) Then using the "what if" module, you can develop 3 different plans for a given year and SEE the difference in tax. Play around with that module from time to time.

From the information you provided? not complete? I would NOT do a complete conversion of your IRA. Rather, I'd step back first. Learn how to do your own taxes on Turbo Tax. (You can still use a tax preparer. Just use Turbo Tax as a personal learning tool re taxes.) Once you have a better understanding of your own personal tax return? Then you are in a better position to figure out the effect that conversions would have and develop an overall plan of how to proceed going forward.

I decided to follow the "middle" ground ... by trying to use up but stay within the 15% tax bracket while it was still available. An alternate course would have been to minimize tax in the short term by not converting at all.

My advice to you? Do not tread into this area of IRA conversion until you have a decent understanding of your past few years tax returns. The flow of the tax return #s, how they interact, and the tax effect of each component.

Total conversion is an extreme measure. Sounds to me like you are grasping at straws with little understanding of the issues involved. Stop. Regroup. Go back to basics. Learn the fundamentals of your personal tax return. And then develop a plan re conversion.

Good luck.

ML
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Moving to a taxable account is wrong on so many levels it is hard to know where to start.

Yes, yes, yes.

Suppose you have $100,000 in an IRA. For the sake of easy numbers, suppose you can get 10% on it. (I wish!)

After a year (year 2), you have $110,000. In the next year (year 3) you get $11,000 interest, for a total of $121,000. In year four you get $12,100 interest, for a total of $133,100.

Now suppose you have it in a taxable account. Again, for easy numbers, suppose the tax is 20%. Year one, you have $100,000. Your 10% interest yields $10,000, but you give $2,000 in taxes. So in year two you start with $108,000. Earning 10% in year three, you get an additional $10,800, of which $2,040 goes in taxes. Now you have $108,000 plus 8,040, or $116,040. One more year, to make the comparison even: you get $11,604 in interest, and you give back 20% to taxes, for an increase of $9,284, or a total of $125,384.

What's the difference between $133,000 and $125,384? The taxes that you paid along the way. You have lost around $8,000 that you would have otherwise had.

This example ignores the fact that you have to pay taxes somewhere along the line, so look at that for a moment. Again, let's - for the sake of easy numbers - say the bite will be 20%.

If you have $100,000 and you pay taxes on it immediately, you will have $80,000 to work with. In year one, that $80,000 will produce $8,000 of increase.

If you don't pay taxes on it immediately, you will have $100,000 to work with. That $100,000 will produce $10,000 of increase. You are ahead by $2,000, which will compound year by year until you do finally withdraw it.

Yes, at that point you will have to pay taxes, but wouldn't you rather pay slightly more taxes on much more principal than pay fewer taxes on much less?

Unless that tax laws change dramatically, or your personal situation will move you into a much higher bracket when you retire (which is the opposite of what usually happens), you are almost always better off deferring taxes until later.

(There may be a few exceptions, for instance I am considering moving some Traditional IRA monies into a Roth IRA and "paying taxes" on it now. Except oops, my income for this year is very small, so the amount I move will require me to pay taxes on an amount below which I am not required to pay taxes. Therefore my "pay taxes" will be zero, even though I am doing something which supposedly requires me to "pay taxes.")
http://boards.fool.com/im-considering-converting-some-of-my-...
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That being the case, you should look carefully at the numbers before making a Roth conversion. Yes the funds from the Roth are tax free when withdrawn, but you will have a big tax hit up front and it takes a long time to earn that back. The tax hit once you stop earning money will be much lower - assuming you take funds out over a period of 10 or 20 years.



yes, one should Carefully look at numbers (esp'ly since we don't know OP's situation .. retired? Age? other income??)

but the tax hit of conversion need not be "big" -- if done over a period of years..

advantages (IMO!)

Roth earnings sheltered* ,principle already taxed
RMDs from IRA lower (more flexibility /no RMDs from Roth*)
Roth goes to heirs slick and tax-free (rules for inherited IRA a bit complicated ...)

last couple years (should have started sooner) : i've done a rough cut of my taxes in Dec. then "what-if'd" various conversions to and convert what Feels like a comfortable tax bill.





*UNTIL the law changes --another advantage of my plan -- it can change as law changes
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but the tax hit of conversion need not be "big" -- if done over a period of years.

But the OP was talking about converting all the IRA money at once -- at least that is what I understand. The OP was not the clearest one ever posted - but that is almost expected when people are trying to clarify something that has them confused.

Gordon
Atlanta
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but the tax hit of conversion need not be "big" -- if done over a period of years.

But the OP was talking about converting all the IRA money at once


true ..just mentioning another option...


-- at least that is what I understand. The OP was not the clearest one ever posted -


yup. and we (answerers) often assume facts not mentioned
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I agree with Watty56! WHY would anyone want to yank all their money out of their IRA -- unless they were desperate?

IF you are older than 59-1/2, a lot depends on your total income when you figure taxes on withdrawals.

I love my IRA. I buy and sell stocks within it, and Fidelity only charges me $7.95 commission on each sale or purchase, and there is NO TAX of any kind as long as it stays in there! If I were smart (or lucky) enough to make a million dollars in that IRA, I'd pay ZERO taxes until or unless I withdrew it.

There are NO fees charged for withdrawing money from my IRA because I am older than 59-1/2. If or when I pull some money out (as I do now and then, and have it moved overnight into my checking account), I may or may not pay any taxes on it at the end of the year, depending on my overall income!

I can tell you that last year I took more than $10,000 out of there, because of some unusual expenses, had NO taxes withheld when I did so, and we ended up paying only about $130 federal tax and $35 state taxes total for the year for both of us! Sure beats capital gains taxes on money I might have been investing OUTSIDE of the IRA!

Vermonter
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Gordon:

You avoided income tax on the money in your IRAs when you put it in. Tax has to be paid when it is taken out.

Maybe yes -- and maybe no.

You MAY pay taxes, yes, but you MAY NOT pay any taxes, either, depending on your overall income, since money withdrawn from that IRA is then INCOME.

See my other post, about the money we/I took from my IRA and how little we paid in taxes!

Vermonter
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