UnThreaded | Threaded | Whole Thread (48) | Ignore Thread Prev | Next
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: of 75777  
Subject: Re: Poll: Did your 401k recover from the 2008 de Date: 12/27/2010 8:30 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
madbrain: "
As for why not to invest all the money aggressively in stocks immediately, it comes down to timing of the taxes:

1) if the value declined significantly before the rollover to Roth, I might have a large capital loss."


I thought these funds were in an after-tax 401-k? Why discuss a capital loss? What happens in the 401-k, generally stays in the 401-k.

"Possibly larger than the $3000 that I can deduct annually."

If my understanding is correct (i.e., that the dollars we are discussing in a 401-k), why is htis even relevant?

"I have zero capital gains to offset since all my investments are in retirement accounts, so having capital losses doesn't do me much good and might spill over to another year. Maybe to a tax year during which my income and tax bracket would be lower and the capital loss wouldn't be worth as much."

I am not following any of this paragraph.

"2) if the value increased significantly before the rollover to Roth, I might have a paper gain, and I would have to pay the taxes on that gain at a high rate of 38% combined federal/state immediately at rollover time."

It is only a paper gain if you do not sell immediately after the roll-over (or immediately before the roll-over, for that matter).

"This would be a short-term gain (less than 1 year) since I plan to do a rollover to Roth of my after-tax contributions every year."

Why is this relevant? The funds are in a 401-k plan, right?.


"Then the money would go to Roth in similar investments (aggressive stocks)."

Only if you do not sell. Nothing requires that the investment be the same after the roll-over.

"If the value then declines afterwards, there is no possibility of ever taking a loss on those."

Generally not.

"I plan to only withdraw the money at retirement time anyway, during which I presumably will be in a lower tax bracket so the capital loss by then wouldn't be worth as much as the taxes that were paid upfront."

What capital loss is there to take? Once it is in the Roth, the account does not generate capital losses that can be offset againt capital gains (or ordinary income, up to the $3,000 annual limit and carry forward until death.

And gettin back to my original point, unless limited by dollars outside the rollover amount to pay taxes and choosing to avoid the penalty that arises from using a portion of the rollover to pay taxes, I fail to see why $x contributed and rolled over is better than $x contributed and $y earned during the interim both being rolled over. There is more in the Roth in the latter scenario.

And if the "38% combined federal/state [tax rate due] immediately at rollover time" unnerves you, then perhaps there should be no roll-over at all.

Many of the people on these boards like the idea of multiple pots of money with different tax consequences - Roth IRA / Traditional IRA/401-k / after-tax accounts with capital gains and losses and dividend income, so that they can mix and match income streams and take advantage of the standard deduction and personal exemption amounts available to them. Having insufficient taxable income to use all of those amounts is effectively leaving money on the table, because they are annual, use it or lose it, options (that are not cumulative).

Regards, JAFO
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (48) | Ignore Thread Prev | Next

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Value Hounds

Clorox Isn't Cleaning Up
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement