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Author: Kilmarnoch Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Re: Roth IRA, WHEN? Date: 1/24/1998 6:45 PM
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Mike wrote:
[[In 1998 and 1999, you are in the 28% bracket and roll your regular IRA into a Roth IRA (during 1998). The amount you are going to roll over is $10K. In the year 2000 and 2001 you earn enough to become a part of the distinguished 31% tax bracket. You will pay 28% tax on 1/4 of the rollover amount ($2500) during tax years 1998 and 1999, and 31% tax on 1/4 of the rollover amount during tax years 2000 and 2001. You would pay the 31% (in 2000 and 2001) even if the $10K added to your AGI for 1998 was still in the 28% tax bracket.]]

note: you really don't pay tax on your AGI, but to keep all the numbers *easy* to play with, assume this person has no deductions...

let me try to paraphrase what I think Mike wrote:
a $10,000 rollover in 1998 appears on taxes as four $2,500 additional incomes. in 1998, 1999, 2000, and 2001. So if you earn 50,000 in 1998 you report 52,500 as AGI and pay taxes on that (in the 28% bracket). If you earn 55,000 in 1999 you report 57,500 as AGI (pay tax in the 28% bracket). In 2000, you earn 65,000 and report 67,500 AGI (which puts you squarely in the 31% tax bracket) then in 2001 you make 65,000+ and again report a 31% AGI. so you pay pay _more_ taxes than you would if you could just include a lump sum addition of 10,000 to your AGI.

I think Mike was trying to point:
- if a lump addition to your AGI now, will keep you in your current tax bracket
and
- you end up in a higher tax bracket over the next four years

then "spreading" the rollover actually hurts you; you would be better off if you could elect to pay your lower tax bracket rate *now*.

TMFTaxes (while tripping over his caps lock) wrote:
[[Sorry, BUT THIS IS COMPLETELY INCORRECT. YOUR INCOME WILL STAND ALONG FROM YEAR TO YEAR, IN ADDITION TO ANY ROTH IRA "SPREAD" INCOME. IT IS MEANINGLESS WHAT YOUR TAX RATE MAY BE IN THE YEAR OF ROLLOVER.]]

Beyond saying Mike was wrong, I don't understand...
the phrase: "your income will stand along from year to year".
I also don't understand how it is "meaningless what your tax rate rate may be in the year of the rollover", because you are paying tax at your current rate on one quarter of the total roll over?

Onto what I think TMFTaxes was saying... in his "Part II" post:

summary of the numbered part:
1. the "special" spreading is *only* available in the 1998 calendar year.
2. you don't have a choice about it... you must use the "special" spread.
3. everything which is based on AGI, except your ability to do addition rollovers will be effected by the "special" AGI addition. (including taxation rate).
4. you don't pay 10% penalty on rollovers. but if you try to touch the money within 5 years after the rollover you pay a 20% penalty. <ick> =)

then in the center of the next paragraph TMFTaxes:
"For 1998, Jack's AGI for income tax purposes will be $85,000 (his regular AGI of $75,000 plus one-fourth of his $40,000 rollover amount). In 1999, 2000 and 2001 Jack will add an additional $10,000 (representing his "spread out" of his 1998 rollover) to his normal AGI for that year, and will pay tax on that "spread out" income at his normal tax rate for those years."

This seems to be saying exactly what I think Mike said... except Mike pointed out that your future [income + rollover spread] could raise you into a higher tax bracket.

TMFTaxes, your posts are very helpful. I have been reading messages here for about 4 weeks... just couldn't understand what you meant in your reply. I thought Mike's statement was correct...

Could you please clarify, your reply?

Thanks,
Kilmarnoch

ps. i sure hope this looks better posted than it does in this crappy little editing window. ;)
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