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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: IRA RMDs and Roth conversions Date: 12/20/2010 4:27 PM
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I am currently doing an IRA-Roth conversion of 130K (1/2 2010 and balance 2011) to bring my Roth up to 200K. It is going to cost me about 40K in Fed and State taxes to do the conversion. IRA RMDs will begin for me in 2012 and my RMDs will be smaller because of the $130K leaving the IRA.

Here is my thinking: My life expectancy is 85 years, leaving me another 15 years of life. I hope to grow the 200K in the Roth account during the remainder of my life. A 6% return for 15 years would grow the 200K in the Roth to $500,000. I am single with two children in their early forties. If I do not need the Roth money during my lifetime, and if I live to 85, and if I can get a 6% return, each of my children will inherit in their late fifties a $250K Roth account that they can utilize as a supplemental tax free pension.

I began my IRA as a Keogh in 1976. My total contributions were made 1976-1980 and amounted to $38,000. No contributions were made after 1980. Now I have $305K in that IRA which will be taxed as withdrawn or converted. The point is that I avoided paying taxes on $38K, but now I am going to have to pay taxes on $305K. Wish they had Roths back then and I was smart enough to contribute that $38K to one!

If the Roth grows to $500k from $200K no taxes are ever paid on the $300K gain because that gain is sheltered by the Roth. Granted, the old man kicked in $40K in taxes for the conversion and I guess you would have to consider the future value of that $40K. But after my death the Roth will continue to compound and the children's annual income grow. Now I hope that they don't cash out all at once to buy a Ferrari.
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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67879 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 4:54 PM
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I am currently doing an IRA-Roth conversion of 130K (1/2 2010 and balance 2011) to bring my Roth up to 200K. It is going to cost me about 40K in Fed and State taxes to do the conversion.



did you consider spreading the conversion over more years to minimize the tax?

since you're close to RMD age, it might not help much .. but that's what i've been doing and for much the same reasoning (estate planning, RMDs)

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67880 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 5:20 PM
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codger41: Subject: IRA RMDs and Roth conversions

I am currently doing an IRA-Roth conversion of 130K (1/2 2010 and balance 2011) to bring my Roth up to 200K. It is going to cost me about 40K in Fed and State taxes to do the conversion. IRA RMDs will begin for me in 2012 and my RMDs will be smaller because of the $130K leaving the IRA.

Here is my thinking: My life expectancy is 85 years, leaving me another 15 years of life. I hope to grow the 200K in the Roth account during the remainder of my life. A 6% return for 15 years would grow the 200K in the Roth to $500,000. I am single with two children in their early forties. If I do not need the Roth money during my lifetime, and if I live to 85, and if I can get a 6% return, each of my children will inherit in their late fifties a $250K Roth account that they can utilize as a supplemental tax free pension.

If the Roth grows to $500k from $200K no taxes are ever paid on the $300K gain because that gain is sheltered by the Roth."

Assuming no change in the tax laws.

"Granted, the old man kicked in $40K in taxes for the conversion and I guess you would have to consider the future value of that $40K."

Yes.

"But after my death the Roth will continue to compound and the children's annual income grow. Now I hope that they don't cash out all at once to buy a Ferrari."

It may not grow tax free as long as you think.

"Although the Roth IRA is not subject to required minimum distribution rules for the account owner it is important to point out that required minimum distribution rules apply for non-spouse beneficiaries of a Roth IRA. [i.e., you children] "In fact, if the beneficiary of a Roth IRA waits too long before deciding how to handle the funds, he or she could wind up with a big tax bill down the road and an unforgettable lesson in frustration."

http://www.investorguide.com/igu-article-850-estate-taxes-un...


"Unlike a spousal beneficiary, someone who is not the spouse of the Roth IRA owner is subject to different rules. . . . A non-spousal beneficiary must take full distribution either by the end of the year marking the fifth anniversary of the account holder's death or over the life expectancy of the beneficiary, starting no later than December 31 of the year following the year the account holder died.

If distributions to the beneficiary do not start by December 31 of the year following the year of the owner's death, the rule requiring a complete distribution of the plan balance within five years will become effective - so it's important to plan accordingly.

All qualified distributions would be tax-free. Failure to take the distribution results in a 50 percent penalty of what should have been distributed. Imagine paying a 50 percent tax when it could have been completely tax-free."

Id.

Regards, JAFO

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67881 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 5:40 PM
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Congradulations codger41! I love it when a plan comes together for someone.

I just looked at moving some of my IRA to a Roth and decided not to do it. I decided to minimize my taxes over the next two years before RMDs instead of taking a tax bump now.

Here's a link to my post ...

http://boards.fool.com/required-minimum-distributions-289713...

I hope that I'm making the right decision. I'd certainly entertain any thoughts that you might have. It's not too late to convert some funds for 2010.

James

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67882 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 8:08 PM
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Assuming your figures are correct, you're paying 20% in taxes ($40k/$200k) which tells me you're in the 15% marginal tax bracket and the conversion is bumping you into the 25% tax bracket. More specifically, I'm figuring that an additional $32.5k of income would be taxed at 15% based you the info you've provided.

Putting the numbers you've provided in a spreadsheet (6% return, $305k IRA value, etc) and assuming your tax situation doesn't change, your RMDs would never exceed $32.5k and your tax on the distribution would never exceed 15%. In other words, by converting your IRA to a Roth, I estimate you're paying 10% more in tax on half of the money you're converting.

You also state that you "wish they had Roths back then", but you don't mention the tax you would have owed on that $38k. Assuming you took 25% tax out of that $38k of investment, you'd have only $229k. As mentioned, you could have taken/can take distributions out of the IRA and pay 15% tax, the taxed value would be $259k today or $30k more than investing in a Roth back in the day.

This is a long winded way of saying you've fallen into the trap of thinking that Roths save you from paying taxes. If my assumptions are correct, you'll end up paying MORE in tax with the conversion, not less.

IMHO, the goal shouldn't be to pay no taxes in retirement, but to manage taxes over your lifetime to pay the lowest rate on your retirement savings. I've posted in the past how investing in a Roth can hurt this goal if you care to search this board.

OTOH, my assumptions may be incorrect, tax laws will change, etc. Your conversion may be a great move, but some of the statements you make lead me to believe that you don't fully understand the tax consequences of Roths.

-murray

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67883 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 10:20 PM
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MurrayS writes,

You also state that you "wish they had Roths back then", but you don't mention the tax you would have owed on that $38k. Assuming you took 25% tax out of that $38k of investment, you'd have only $229k. As mentioned, you could have taken/can take distributions out of the IRA and pay 15% tax, the taxed value would be $259k today or $30k more than investing in a Roth back in the day.

This is a long winded way of saying you've fallen into the trap of thinking that Roths save you from paying taxes. If my assumptions are correct, you'll end up paying MORE in tax with the conversion, not less.

</snip>


That's right. A Roth IRA conversion is a bet that you'll be in a higher tax bracket when you retire.

Most people aren't. (At least until the RMDs start at age 70-1/2)

intercst

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67884 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 11:31 PM
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This is a long winded way of saying you've fallen into the trap of thinking that Roths save you from paying taxes. If my assumptions are correct, you'll end up paying MORE in tax with the conversion, not less.

Exactly. Before doing a Roth conversion, you should certainly consider the tax consequences, and if the rate to be paid is high, it is not a good idea.

But recent posters have noted that the 15% federal tax bracket goes up to $68K for a married couple.

Many early retirees can have low income years--especially if they are set up to pay taxes only on what they spend (leaving the rest in the IRA or 401K until needed).

We know that the pretax contributions and untaxed gains in your IRA or 401K are fully taxable at ordinary income tax rates when you take distributions. And RMD's at age 70-1/2 can force your into higher tax brackets.

Personally I doubt that you will ever pay less than 15% on your distributions. Therefore doing partial Roth conversions to use of any remaining 15% tax bracket can be a good idea. But it does depend on the details of your situation.

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67885 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/21/2010 12:18 PM
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I do partial conversions when I can fit them into my 15% bracket because I don't know where tax rates will go in the future. I'm just hedging my tax bets by keeping some money in a TIRA and some in a Roth.

-drip

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67887 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/21/2010 5:13 PM
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Murray,

My goal in the conversion is estate planning. A $500,000 inheritance compounding tax free and delivering tax free income is an awesome thing.

I am completely ignorant when it comes to spreadsheets.
If I don't convert, I take RMDs on the $130K, earn 6% taxable on the account, reinvest the after tax RMDs in taxable investments @6%, live to be 85, and leave the balance of the IRA and the after tax RMD money to my kids, what will they inherit and what tax consequences will ensue for them?

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67888 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/21/2010 5:31 PM
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I had thought about spreading the contributions. Thanks to you a light came on. I can convert the whole $130K in 2010 and pay no 2010 tax on the conversion. Then I can claim 1/2 ($62.5K) in 2011 with tax due April 15, 2012 and the other 1/2 in 2012 with the tax due April 15, 2013. I'll have to make estimated tax payments every quarter, but it will give me time to collect the taxes.

I had thought that if I made the $130K conversion in 2010 the tax would be computed on $130K payable over two years. That would put me into the 28% bracket. But being able to report $62.5 in 2011 and again in 2012 will put more of the conversion into the 15% and 25% brackets. And spreading the tax out over 8 quarters helps.

Thanks

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67889 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/21/2010 7:55 PM
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If I don't convert, I take RMDs on the $130K, earn 6% taxable on the account, reinvest the after tax RMDs in taxable investments @6%, live to be 85, and leave the balance of the IRA and the after tax RMD money to my kids, what will they inherit and what tax consequences will ensue for them?

I think that when you inherit a stock or mutual fund, your cost basis for the invested shares is the price on the date of death. If that's correct, it's almost better than a Roth because there are no restrictions on withdrawal.

I had thought that if I made the $130K conversion in 2010 the tax would be computed on $130K payable over two years. That would put me into the 28% bracket. But being able to report $62.5 in 2011 and again in 2012 will put more of the conversion into the 15% and 25% brackets. And spreading the tax out over 8 quarters helps.

What's the rush? Why not spread it out over several years so you don't pay any 25% tax?

I agree that shifting the IRA into a Roth is a good idea, but I see no benefit to paying 25% to do so. Your kids will inherit more money if you take your time and keep the taxes at 15%.

A $500,000 inheritance compounding tax free and delivering tax free income is an awesome thing.

I totally agree, but the same inheritance plus another $10k compounded from taxes saved would be even better.

-murray

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67890 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/21/2010 8:36 PM
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I think that when you inherit a stock or mutual fund, your cost basis for the invested shares is the price on the date of death.

correct ...but could be one of the things they change to increase revenue.



If that's correct, it's almost better than a Roth because there are no restrictions on withdrawal.


yup... but you have to balance tax-deferred earnings of Roth v possibly taxed earnings of Taxable (IF you can buy XYZ and let it sit for ever, the latter wins / if you're trading and getting dividend -- Roth might be better)


What's the rush? Why not spread it out over several years so you don't pay any 25% tax?


exactly .. fwiw --i'm converting chunks while staying in the 10% bracket.

on the other side, if the IRA is big enough, you might want to convert as much as possible to limit RMDs


=

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67895 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 9:06 AM
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I am enjoying this discussion about the merits of my Roth conversion of part of a $300K IRA at age 69. I now realize that I need to learn how to cut and paste participant's statements into my own responses in order to avoid endless typing of quotations. Is that difficult?

Codger41

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67896 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 10:04 AM
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Not really hard at all but a bit of a pain.

If you are responding to only one post you can click on the reply "button" and a reply window will open into which you type your reply.

If you want to post a portion of the post that you are responding to ... Scroll up to the area above your reply and you will see the post that you are responding to. Highlight the text that you want to included with your mouse and then type <Ctrl><c> (for copy) and then move your cursor back to your reply window to the place you want to paste the text. <Ctrl><v> will paste the text.

I like to then preceed the pasted text with "" and follow it up with "". This will cause the pasted text to be in italics, making it stand out from your response.

When I want to paste from several posts within a thread, I open the entire thread in a second browser window so all the posts are available to copy text from using <Ctrl><c>.

Hope that these instructions are sufficent to get you going. If you haev any questions, just ask.

James

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67897 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 10:08 AM
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Sorry but my instructions for italics didn't do you much good. The first "" contains ... < i >. The second pair of quotes contains < / i >. To make it work though you need to remove the spaces between the <>.

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67898 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 10:47 AM
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Thanks James,

I'll practice until I get the hang of it

Mike

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67899 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 11:45 AM
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Mike said ... I'll practice until I get the hang of it

To which I say ... Remember you can always Preview Message and then contunue editing it if necessary.

James

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Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67901 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 12:39 PM
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You can also highlight the section you want to quote by pointing and holding down your mouse button until the end of the section. Once highlighted, you can point to it again, hold down the button and drag the section to the reply window.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67902 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 12:46 PM
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JCMcCarter,

You wrote, Sorry but my instructions for italics didn't do you much good. The first "" contains ... < i >. The second pair of quotes contains < / i >. To make it work though you need to remove the spaces between the <>.

So what you meant to say was more like, I like to then preceed the pasted text with "<i>“ and follow it up with ”</i>". This will cause the pasted text to be in italics, making it stand out from your response.

Correct? :-)

- Joel

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67905 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 4:23 PM
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You can also highlight the section you want to quote by pointing and holding down your mouse button until the end of the section. Once highlighted, you can point to it again, hold down the button and drag the section to the reply window.

Windows machines also have two-buttons on the mouse.

You can highlight what you want to copy by holding down the left mouse button. Clicking the right mouse button brings up a menu. Select copy from that menu.

Then move the cursor whereever you want the text copied. Right click again and select paste to complete process.

(I then add the italics code, but you can also code for bold instead of italics by subsituting b for the i.)

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Author: RHinCT Big gold star, 5000 posts Ticker Guide SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67911 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 6:03 PM
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You can also highlight the section you want to quote by pointing and holding down your mouse button until the end of the section. Once highlighted, you can point to it again, hold down the button and drag the section to the reply window.

Cool! Always nice to learn a new trick.

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67912 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 6:40 PM
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Cool! Always nice to learn a new trick.

I'll second that sentiment! Thanks!!

James

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67913 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/22/2010 7:00 PM
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pauleckler,

You wrote, (I then add the italics code, but you can also code for bold instead of italics by subsituting b for the i.)

Beside using <b>for bold</b>, you can also use <tt>to show a fix-spaced (usually a courier) font</tt>. Also there's the code <pre> that can be used for embedded tables like:
<pre>
Column A Column B
A 1
B 2
C 3
Total: 6
</pre>

There... Now who can guess how I managed to show the various HTML formatting tokens without any embedded spaces?

- Joel

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67930 of 76418
Subject: Re: IRA RMDs and Roth conversions Date: 12/23/2010 3:10 PM
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Some slick tricks you have there, Joel. Thank you.

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