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Author: ilmostro Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121150  
Subject: Roth and Traditional Ira Date: 9/17/1998 4:22 PM
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Hi, everyone. I have a converted Roth and a contributory Roth and will soon roll over a 401k into another Ira. The question is should I convert the 401k money into another Roth Ira (yes I know you have to first convert to traditional and then Roth). And yes I can pay the taxes due with money outside of the Ira. I like the idea of converting in 98 because I get to spread the taxes out over a 4 year period, but I also like the idea of having 2 different types of Ira's (roth and traditional) so that if the Congress changes the Ira laws in the future one Ira might be better than the other and thus by having both types I am covering my behind in a sense. Any ideas? Thanks, Bryan
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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: 5377 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/17/1998 8:57 PM
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[[Hi, everyone. I have a converted Roth and a contributory Roth and will soon roll over a 401k into
another Ira. The question is should I convert the 401k money into another Roth Ira (yes I know you
have to first convert to traditional and then Roth). And yes I can pay the taxes due with money
outside of the Ira. I like the idea of converting in 98 because I get to spread the taxes out over a 4
year period, but I also like the idea of having 2 different types of Ira's (roth and traditional) so that if
the Congress changes the Ira laws in the future one Ira might be better than the other and thus by
having both types I am covering my behind in a sense. Any ideas? Thanks, Bryan]]

You can't outguess the Congress, Bryan. If it makes sense for YOU to make the conversion, I'm not sure that I would try to second guess what may happen in the future. My crystal ball just isn't that good.

I must admit that I have a personal bias: when it comes to taxes, my mantra is generally: defer, defer, defer! The new capital gains rates of 20% have tempered that view somewhat, because I'm not sure that we'll ever see a capital gains rate less than 20% (but I sure hope I'm wrong).

But I'm just not a big proponent of paying real tax dollars today, for the hope and promise that I'll get tax free dollars in the future. I'm sure that Bill told Monica that he loved her. Get my point?

As has been pointed out here in the past, many times there are very compelling reasons to convert to a Roth and pay the tax today. But I just believe that way too many people are jumping in without seeing if there is any water in the pool. I get that sense because of all of the clients that have shown an interest in Roth conversion, I would guess that we have really only converted about 10% of them. The other 90% had compelling reasons why they should NOT convert...but might just have gone ahead anyway if they didn't have an objective person to talk to.

So if you have already done your homework, and find that the conversion is the best way for you to go, then you might just want to jump in. On the other hand, if it makes sense for you to retain some funds in a regular IRA account (for reasons OTHER than the potential changes that Congress may or may not inact in the future), then keep the regular IRA account.

Others may disagree. Perhaps some other Fools will weigh in and provide some additional insight.

TMF Taxes
Roy

SPECIAL NOTE: Remember that this response is not the "last word" on your situation. It is really only a starting point. Make sure to review the "Read This First" post
(http://www.fool.com/School/Taxes/TaxesDisclaimer.htm) for additional information. In addition, many of your questions may already be referenced in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's Money area (http://www.fool.com/money.htm) and check out "Tax FAQs" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov).

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Author: shess Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5396 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/19/1998 1:17 AM
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TMFTaxes writes:
<<But I'm just not a big proponent of paying real tax dollars today, for the hope and promise that I'll get tax free dollars in the future.>>

I'm suspecting I might be in the exception area. My wife and I don't plan to convert our IRAs, and earn too much to make tax-free regular IRA contributions. So, we're looking at opening Roth IRAs.

I understand that with conversions, if you later determine that your taxable income is too high, you can back them out. How about for _new_ contributions? We're close enough to the earning limits for Roth IRA contributions that if we were to receive good bonuses, it could push us over the top. Initially, I figured we could just punt and contribute once the year was behind us, but the recent stock market declines have me rethinking that option.

Later,
scott


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Author: tc001 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5397 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/19/1998 9:27 AM
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Bryan wrote:
>>.... I also like the idea of having 2 different types of Ira's (roth and traditional) so that if the Congress changes the Ira laws in the future one Ira might be better than the other and thus by having both types I am covering my behind in a sense.<<

TMFTaxes replied:
>>As has been pointed out here in the past, many times there are very compelling reasons to convert to a Roth and pay the tax today. But I just believe that way too many people are jumping in without seeing if there is any water in the pool.<<

Roy's point about having compelling reasons to convert (IMO) hits most directly at the Roth advantage in estate planning. My arguement all along has been that most people are pretty sure of what kind of estate they'll leave behind, and for most people it's only wishful thinking that they'll amass a small fortune for their heirs through an IRA, which kills the best reason for the Roth conversion. (I can cover this in another post if you have doubts about why we all won't become rich just because of IRAs.)

So if estate planning isn't your reason for converting, then the "less compelling" reasons come up. The biggest of these is, of course, getting tax-free money in retirement. On Jan. 31, I posted a very lengthy analysis that dampens the widely proclaimed Roth "tax-free" advantage. In short, every analysis I saw at the beginning of the year (when the topic was very hot) failed to recognize that even if you end up with a million dollars or more in your IRA, that alone won't necessarily cost you more in taxes paid with a traditional IRA than what you might save through a Roth. Most calculations ignored some very basic assumptions, which made the Roth look invincible, and I've been whining about it since December. (Thanks for getting me started again, Bryan!)

I agree that the diversification idea (as I have also said before) is appealing. If you can't predict future tax laws, CYA! But the best way for most people to achieve that diversification is to leave traditional IRAs alone and simply put all future contributions into a Roth.

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Author: DarrellK One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5398 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/19/1998 12:57 PM
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shess writes:
I understand that with conversions, if you later determine that your taxable income is too high, you can back them out. How about for _new_ contributions?

Yep, from http://www.rothira.com/rothregs.htm :

Any contribution that is distributed, together with net income, from a Roth IRA on or before the tax return due date (plus extensions) for the taxable year of the contribution is treated as not contributed.

In other words, if you back out a contribution and all earnings on that contribution, you won't be penalized. There's plenty of info on this issue here:
http://www.fairmark.com/rothira/excess.htm

- Darrell (not a tax expert)

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Author: ilmostro Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5407 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/20/1998 11:40 PM
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Hi Fools, I appreciate all the ideas and suggestions I have received and I still haven't made up my mind as of yet whether to convert this 401k transfer to a Roth. I am putting all my future 2k per year in my contributory Roth since I don't qualify for a tax deductible Ira. (No brainer, right?) I am nowhere near the 100k limit so that is a non issue. TMFTaxes said to not try and 2nd guess the Congress and I think by keeping both the traditional and Roth that this leaves me more flexibility in the future. Can you convert only a portion of a Traditional Ira? Or does it have to be 100%? The reason I ask this is because I would like to keep both Ira's equally weighted (i.e. approximately the same amount of $$$$'s in each). Probably not possible or even worth the extra paperwork and effort though. Thanks everyone, Bryan

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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: 5421 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/22/1998 12:14 AM
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[[I understand that with conversions, if you later determine that your taxable income is too high, you
can back them out. How about for _new_ contributions? We're close enough to the earning limits
for Roth IRA contributions that if we were to receive good bonuses, it could push us over the top.
Initially, I figured we could just punt and contribute once the year was behind us, but the recent
stock market declines have me rethinking that option.]]

Both contributions and conversions can be recharacterized based upon the law recently passed, Scott. But they would then have to go to an IRA which, in your case, could very well be non-deductible.

TMF Taxes
Roy

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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: 5427 of 121150
Subject: Re: Roth and Traditional Ira Date: 9/22/1998 12:47 AM
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[[Hi Fools, I appreciate all the ideas and suggestions I have received and I still haven't made up my
mind as of yet whether to convert this 401k transfer to a Roth.]]

Nobody can blame you. It's a difficult decision.

[[ I am putting all my future 2k per
year in my contributory Roth since I don't qualify for a tax deductible Ira. (No brainer, right?)]]

Absolutely. Of all of the Roth issues, using a Roth in place of a non-deductible IRA is certainly the one and only no-brainer.

[[ I am
nowhere near the 100k limit so that is a non issue. TMFTaxes said to not try and 2nd guess the
Congress and I think by keeping both the traditional and Roth that this leaves me more flexibility in
the future. Can you convert only a portion of a Traditional Ira? Or does it have to be 100%?]]

Any or all, my friend. Any or all. The amount of the conversion is strictly up to you.

[[ The
reason I ask this is because I would like to keep both Ira's equally weighted (i.e. approximately the
same amount of $$$$'s in each). Probably not possible or even worth the extra paperwork and
effort though. ]]

No problem. You can certainly do that if you desire. No problem whatsoever.

You might want to go back to the posts that were put up here last Sept, Oct, Nov, Dec, of 1997...and even many of the posts this spring. tc001 did just a FAB job of laying out all of the information and the analysis on the Roth IRA issue. Some of his posts, I'm sure, you'll find very eye-opening.

TMF Taxes
Roy

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