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Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121113  
Subject: Pay the tax or not? Date: 7/26/2000 6:34 PM
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I am a newbie to this format. I have a question.

I am 57 yrs old. I have a six figure sum in a pre-tax account earning 8.5% guraranteed. When I reach 70 1/2, the fed will determine at what age I will die, and require me to formulate a plan that will require me to divest that fund by the date that they set.

I know that the normal tax strategy is to defer paying taxes until you are forced into it, however, I am thinking that I should begin taking, say, $2000 per mo. out of it now, pay the taxes, and reinvest in one of the index funds on a monthly basis.

The theory behind my thinking is that by beginning earlier, I will be required to take smaller divestments, hence they will be in a lower tax bracket, that I would be taking advantage of dollar cost averaging, and the new investment will have the opportunity of taking advantage of the time factor (or what's left of it at my age). Also, if the economy goes South, then in 10 years or so, I would only have depleted about half of the guaranteed account, and have some of my nest egg still intact.

Should I begin the strategy now, or wait until 70 1/2?

Another related question, considering brokerage fees, if my strategy is viable, should I take a once a year sum from the original account, or a monthly sum?

Thank you,

Arlie

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Author: JackH One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38100 of 121113
Subject: Re: Pay the tax or not? Date: 7/27/2000 1:22 PM
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Why not move some of it into a Roth--perhaps waiting until you reach 59.5?

JackH

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Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38170 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 9:08 AM
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Wouldn't I be limited to $2000 per year?

Arlie

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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38172 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 11:47 AM
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Arlie,

Your said your funds were in a "pre-tax account". I think JackH was assuming you were talking about an IRA, or an account that could be transferred into/rolled over into an IRA. Then you could (if you meet the qualifications) convert some of that IRA to a Roth IRA, paying the taxes due at that time.

I don't know if you have read TMF's articles on taxes in general, and IRAs in particular -- they should be helpful to you. (Start here: <www.fool.com/taxes/taxes.htm>, and follow the links for IRAs.) In addition, you could use TMF's powerful search capability and look at recent (within the last 4 to 6 months) threads dealing with what you're proposing.

The intent of TMF is to provide "tools" -- information, calculators, links to IRS forms/instructions, etc. -- to allow people to assess their situation and make their own decisions. I can tell you that it seems to me that you're on the right track!

Good luck,
Phooley


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38183 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 6:04 PM
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<<I am 57 yrs old. I have a six figure sum in a pre-tax account earning 8.5% guraranteed. When I reach 70 1/2, the fed will determine at what age I will die, and require me to formulate a plan that will require me to divest that fund by the date that they set.>>

I assume that when you use the term "pre tax" account, you are talking about an IRA, SEP or related account. That is how I'll present my response.

In effect, the statement that you present here is absolutely correct. You've hit the nail right on the head.

<<I know that the normal tax strategy is to defer paying taxes until you are forced into it, however, I am thinking that I should begin taking, say, $2000 per mo. out of it now, pay the taxes, and reinvest in one of the index funds on a monthly basis.>>

Since the funds are in an IRA (or similar) account, you might heed the suggestion of a prior response: simply create your own conversions to a Roth IRA on an annual basis. You're NOT limited to $2k per year on CONVERSIONS. You ARE limited to a $2k per year Roth IRA CONTRIBUTION. They are two entirely different things.

As you point out, that would allow you to take $12k per year, realize the tax on that distribution now, smooth out the tax bite, and have some (or perhaps even most) of it in the Roth IRA ready to receive completely tax free treatment in the future.

Is it a good way to go? Certainly could be. I have many of my clients on a similar path. And there may be additional benefits to you by creating a Roth IRA. And, you can begin making these conversions from your traditional IRA account into your Roth IRA account now...you don't have to wait until you're 59 1/2 or any other age.

As Phooley pointed out, you might want to check out my series of artices in the Taxes FAQ area relating to the Roth IRA for additional information on this issue. It might help you with your decision.

TMF Taxes
Roy


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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38184 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 6:13 PM
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For those who may have been following Arlie's thread here, I found that the author had posted the same question over on Retirement Investing, and provided some more details over there: <http://boards.fool.com/Message.asp?id=1040013006120005>.

Just trying to facilitate communication,
Phooley in Phoenix

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Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38201 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 9:55 PM
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You and Phooly have been extremely helpful. I am thanking you, and Phooley in the same response in hopes that he/she will see my thanks

Arlie

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Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38205 of 121113
Subject: Re: Pay the tax or not? Date: 7/29/2000 11:02 PM
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I read and printed off all VII of your articles. I have never seen such lucid information regarding Roth accounts before.

Thank you for the information. I think I still have some questions, but I am going to consume your articles one other time before I ask.

Thanks to you and to Phooey for pointing me in the right direction.

Arlie

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Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38206 of 121113
Subject: Re: Pay the tax or not? Date: 7/30/2000 12:28 AM
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In regards to your informative article, I am under the assumption that it would be advisable for a person to open a Roth IRA as soon as possible, even if he just puts $500 into it. The theory being, I am 57 now, that I can then retire at say 62, begin putting the $30,000 per year in the account at that time, and not be concerned about the 5 tax-year waiting period, even though I did not begin putting the larger amount in until well after I was 59 1/2.

I haven't run the numbers out, but this seems to me that it would also be a very useful tool to avoid estate taxes upon mine and my wife's death. That portion of the estate contained in the Roth IRA would not be included in the $600,000 to $1.2 M (according to what year I might die) tax exclusions.

Arlie



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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38208 of 121113
Subject: Re: Pay the tax or not? Date: 7/30/2000 1:19 AM
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I haven't run the numbers out, but this seems to me that it would also be a very useful tool to avoid estate taxes upon mine and my wife's death. That portion of the estate contained in the Roth IRA would not be included in the $600,000 to $1.2 M (according to what year I might die) tax exclusions.

Roth's can be a good tool for managing income taxes, but they don't reduce your estate tax. The value of the Roth account (like any other IRA) will be included in your estate subject to tax.

--Peter

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38282 of 121113
Subject: Re: Pay the tax or not? Date: 7/31/2000 7:12 PM
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<<In regards to your informative article, I am under the assumption that it would be advisable for a person to open a Roth IRA as soon as possible, even if he just puts $500 into it. The theory being, I am 57 now, that I can then retire at say 62, begin putting the $30,000 per year in the account at that time, and not be concerned about the 5 tax-year waiting period, even though I did not begin putting the larger amount in until well after I was 59 1/2.>>

After all of the kind words that you gave me in prior posts, you might take them all back after reading my response here.

In fact, that section of the Roth IRA is poorly written (at best) and misleading (at worst). Or both.

The fact of the matter is, you'll have two 5 year holding periods: one for your contribution and one for your conversion. So simply making a $500 contribution to a Roth IRA in 2000, and a conversion in 2005 will NOT allow you to remove the conversion funds immediately in 2005 using the "five year" rules.

If you were to make a conversion in 2005, you would use THAT date in order to satisfy the 5 year rules. So your appropriate distribution date would likely be some time in 2010 to make the distribution "qualified".

So, generally speaking, the earlier you make your conversions, the faster you'll be able to take distributions from those converted funds.

<<I haven't run the numbers out, but this seems to me that it would also be a very useful tool to avoid estate taxes upon mine and my wife's death. That portion of the estate contained in the Roth IRA would not be included in the $600,000 to $1.2 M (according to what year I might die) tax exclusions. >>

As Peter points out, having a Roth IRA will save your heirs some considerable income taxes (as opposed to a traditional IRA). But the Roth will not reduce or eliminate any of your estate tax issues. The value of your Roth IRA account will be included in the total value of your estate...just the same as a traditional IRA. So don't confuse potential income tax benefits with estate tax benefits.

TMF Taxes
Roy


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