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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75649  
Subject: Re: IRA's, Keoghs, income limits, HELP! Date: 4/15/1998 3:05 PM
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Ray,

<<It is quite possible (dare I say "likely"?) that congress 30 years from now will tax ROTH IRA distributions. Maybe not directly, but it's easy to tax it indirectly by means-testing other payments (like Social Security) or phase-out of other deductions.>>

With the Congress, anything is possible. However, if means testing comes into play the traditional IRA withdrawals will also be in the equation AND they'll be taxed, too. As to direct taxation of the Roth, Congress does some mighty dumb things , but they ain't all that stupid. I believe quite strongly that not only will that NOT happen, Congress will avoid even the hint of it happening. At worst and IMHO they will discontinue future contributions while grandfathering the tax status of those already existing.

<<So, I can't see how, for most people converting an ordinary IRA to a Roth can be, at best, any more than a wash. If taxes stay the same, it is a wash. If your tax rate goes up by 10%, the mistake only costs you $30 in today's dollars. By risking this $30, you are buying insurance against being taxed both now and 30 years from now. Since the future is unknown, you can't do anything about it. You can only do something in the present; and it seems to me rather silly to voluntarily pay taxes now in the hope that by doing so that you won't have to pay taxes in the future.>>

I'll agree the appropriateness of a conversion will vary from person to person, but I disagree it's invariably at best a wash. Much depends on how the taxes are paid on the conversion and how long the money remains in the account. Changes (i.e., increases) in tax rates 30 years from now will have a much more adverse impact on the traditional IRA. If you recall my analysis, if the rate stays the same and the conversion tax is paid from other resources, the Roth wins. If one drops from a 28% marginal rate today to a 15% marginal rate 30 years from now, the Roth wins if the money stays in the account for more than ten years.

And one other thing. The Roth for some can be a significant estate planning tool in passing wealth on to heirs. In certain instances, it will save heirs thousands on death because the Roth escapes income taxes (but not estate), whereas the traditional IRA doesn't. Also, the traditional IRA forces distributions at age 70 ½, and the Roth doesn't. More than a few folks will find both of those aspects quite important in their planning.

Face it, the Roth can be and is a good tool for many. Just as true, it's not for many. The important thing is no one can assume it's the best thing since sliced bread. However, no one should arbitrarily write it off as a "wash" either, and that's what you seem to be encouraging by your repeated comments in the negative.

Each of us must examine the merits and demerits based on our own situation. Then we choose. And once that's done, we follow Pixy's credo:

"Ya makes your choices, and ya lives with the results."

Regards…..Pixy
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