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Author: toogie One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75825  
Subject: Roth changes? Date: 12/9/1998 10:46 PM
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I'm getting ready to set up my Roth IRA, and I'm not sure how much of a hurry I should be in.

I heard somewhere that there are some changes in the rules that will effect those who start their IRA after Dec. 31, 1998. Unfortunately, I can't find out what those changes are.

Does anyone have any information on the pros and cons of starting a Roth IRA before Dec 31?

toogie
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Author: ZorroJester Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7148 of 75825
Subject: Re: Roth changes? Date: 12/10/1998 9:21 AM
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For example, see post #7087. Basically, if you convert to a Roth before 12/31/98, then you have the OPTION of spreading the resultant tax liability over 1998-2001 in four equal chunks. (If you wish, you can always pay all the taxes in 1998. This might make sense for some.) However, if you wait until after 12/31/98 to convert, then you cannot take advantage of the four-year tax spreading rule.

For example, if your traditional IRA is worth $1,000 and you convert on 12/1/98. Then, if you are taxed at 28%, your taxes will be $280. You can then either pay $280 in extra taxes in 1998, or you can pay $70 in extra taxes in each of 1998, 1999, 2000, and 2001. (Let's ignore for the moment those nasty little details regarding distributions during those four years.)

There might be other things, too, but that's the first rule change I can think of.

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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: 7155 of 75825
Subject: Re: Roth changes? Date: 12/10/1998 9:29 AM
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Greetings, Toogie, and welcome. You asked:

<<I'm getting ready to set up my Roth IRA, and I'm not sure how much of a hurry I should be in.

I heard somewhere that there are some changes in the rules that will effect those who start their IRA after Dec. 31, 1998. Unfortunately, I can't find out what those changes are.

Does anyone have any information on the pros and cons of starting a Roth IRA before Dec 31?>>


The December 31, 1998, date is important only to those folks who want to convert a traditional IRA to a Roth IRA and take advantage of spreading the taxable income resulting from that conversion over four tax-years. To use that four-year spread, the conversion must occur no later than 12/31/98. You may make your 1998 annual contribution to a Roth as late as the due date of your tax return, which is 4/15/99 for most people. Therefore, if you are converting an existing traditional IRA to a Roth IRA and wish to use the four-year income spread, the 12/31/98 date is important. If all you're doing is opening a Roth IRA with a deposit coming out of your wages, then you have until 4/15/98 to do that.

Regards….Pixy



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Author: toogie One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7159 of 75825
Subject: Re: Roth changes? Date: 12/10/1998 1:27 PM
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Thanks for the answers! Sounds like I don't have to worry about it, then.

I did hear some vague thing (one a promo for a tv show, I think) that mentioned beneficiaries, but it was too vague to know if it applied to the changes.

toogie

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Author: trudyKAS One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7179 of 75825
Subject: Re: Roth changes? Date: 12/10/1998 7:44 PM
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If you are investing for beneficiaries, the Roth is the way to go. Instead of 37to 55% estate taxes after you are gone, you pay the income tax at your marginal rate now. If, (and I assume this is the case) you are planning this for your beneficiaries, the money will continue to grow with now withdrawal requirement until you have earned you golden wings. The your beneficiaries are only required to withdraw based on the expected life span of the oldest beneficiary.

And no ordinary incom or capital gains taxes, ever!!!

What a fantastic legacy.

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Author: Wyvern51 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7180 of 75825
Subject: Re: Roth changes? Date: 12/10/1998 9:00 PM
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<<Instead of 37to 55% estate taxes after you are gone, you pay the income tax at your marginal rate now...>>

People often confuse income taxes with estate taxes.

Any amounts in your Roth IRA (or in any other retirement fund) would be included in your gross estate and would be subject to estate taxes. Estate taxes are paid by the estate before distributions are made to beneficiaries. The beneficiaries may then withdraw from an inherited Roth IRA at the appropriate rate without incurring income taxes.

I hope you find this useful.

Don




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Author: trudyKAS One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7212 of 75825
Subject: Re: Roth changes? Date: 12/11/1998 6:12 PM
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I believe when I mentioned paying income tax during life to reduce the estate tax afterward, I was referring to the fact that the money you spend now is assumed to be no longer available in your estate. Unless you disburse your wealth as gifts of over $10,000 per person per year during life which would reduce the estate tax exemption, your entire estate up to the exemption, varying from an estate of $625,000 this year up to $1,000,000 in the next century, while possible subject to some income tax, could be free from federal estate taxes. I believe that at least some of our Fools are below that threshold, and could find this information useful.

I'm sorry if my statements gave the impression that an income tax was related to an estate tax. Income tax is a life tax. Estate tax is a death tax. The gift tax is part of the unified Estate and Gift tax package. What you don't use in life can be used after death.

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Author: HubCapBurger Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7261 of 75825
Subject: Re: Roth changes? Date: 12/13/1998 10:23 PM
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Oh Great and Foolish Oracle,

If I converted a standard IRA to a Roth on the 30th of June, 1998, does the IRS consider the taxable income as having been earned on 30 June for purposes of determining the tax and any fines due?

If I choose to spread the transaction out over four years, does the IRS consider the taxable income accrued in the following 3 years to have occurred on 1 Jan 99, Jan 1 2000, and Jan 1 2001?

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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: 7265 of 75825
Subject: Re: Roth changes? Date: 12/14/1998 9:22 AM
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HubCapBurger asks:

<<If I converted a standard IRA to a Roth on the 30th of June, 1998, does the IRS consider the taxable income as having been earned on 30 June for purposes of determining the tax and any fines due?

If I choose to spread the transaction out over four years, does the IRS consider the taxable income accrued in the following 3 years to have occurred on 1 Jan 99, Jan 1 2000, and Jan 1 2001?>>


I believe your question is directed toward the payment of estimated tax withholding based on the income that must be declared as a result of a conversion of a traditional IRA to a Roth IRA. If you convert on 6/30, then that year's estimated payment for income tax withholding must be made by September 15 to avoid a penalty for underpayment unless you know for a fact that your withholdings for the year will have been sufficient to cover the taxes due. In general, you must make an estimated tax payment if you will owe at least $1K in taxes over and beyond your actual withholding for the year and you expect that withholding to be less than 90% of the taxes due in that year or 100% of the actual taxes paid in the prior year. The same rule applies for subsequent years. Therefore, if you adjust your withholding at the beginning of 1999 (or later years) so the payments cover at least 90% of the taxes due for that year or 100% of the taxes paid in the prior year, you won't have to worry about estimated payments. If you don't do that, then you will have to make an estimated tax payment based on your conversion income by April 15, 1999.

Regards….Pixy


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