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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Roth Conversion? Date: 1/4/1998 10:07 AM
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I would like to provide for your consideration, a few comments regarding the potential conversion of a traditional to the new Roth IRA. Based on the conventional criteria being bandied about regarding time horizon and future tax rates, I would probably have to consider myself a prime candidate for conversion. I find myself extremely reluctant to do so however.

Years ago, I started a traditional IRA. It was not a decision I entered into lightly. The IRA was a new and previously unheard of type of program. After performing a great deal of due diligence in evaluating all aspects of the program and how they related to my personal financial situation and plans for the future, I took the plunge. Had I known that within the short span of a few years, congress would make modifications to the program which, for me, effectively eliminated the deductability of contributions, I might have reconsidered the advisability of my involvement. The deductability of contributions was after all, the major inducement for participation in the program and was the hook that conviced me and many others to become involved. Since congress saw fit to leave untouched the considerable penalty for early withdrawals (bless their hearts) I have retained my IRA and in fact make regular (nondeductable) contributions.

It has not gone unnoticed that for all converted accounts, taxes will be collected on a pot of money which otherwise would not become taxable until some distant future time. Perhaps it would not be overly cynical to suspect that the tax eaters in D.C. would be inexorably drawn to a much larger (and previously untaxed) pot of money sitting in all those Roth IRAs. It is also very easy to visualize a situation brought on by some budget crisis during which the considerable benefits of the Roth IRA would be curtailed. Everyone is talking about how the Roth IRA is the greatest thing since sliced bread. (Some would say too good to be true). Everyone is sharpening their pencils, reading the tax manuals and crunching the numbers. But all of this activity is being carried out with the unstated assumption that the Roth IRA will always exist in its current state. It ain't necessarily so. This approach may be hazardous to your wealth. Your Government asks you to make long term commitments when you enter these programs. Your elected represenatives however, operate with a considerably shorter time perspective.

Every time I have ever lost money, it has been when I have lost personal control. Years downstream, it may be that the greatest benefit of the Roth IRA is that it diverted the attention of the tax eaters from the traditional IRA and which would therefore have become a more dependable (stable) vehicle for the planned accummulation of wealth. As for now, I think I will stand pat. For me, it is a case of "once bitten, twice shy" Or, as I have previously stated, you can....

FoolMeOnce
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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: 1047 of 75340
Subject: Re: Roth Conversion? Date: 1/4/1998 11:17 AM
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Greetings, FoolMeOnce, and welcome.

<<I would like to provide for your consideration, a few comments regarding the potential conversion of a traditional to the new Roth IRA. Based on the conventional criteria being bandied about regarding time horizon and future tax rates, I would probably have to consider myself a prime candidate for conversion. I find myself extremely reluctant to do so however.

Years ago, I started a traditional IRA. It was not a decision I entered into lightly. The IRA was a new and previously unheard of type of program. After performing a great deal of due diligence in evaluating all aspects of the program and how they related to my personal financial situation and plans for the future, I took the plunge. Had I known that within the short span of a few years, congress would make modifications to the program which, for me, effectively eliminated the deductability of contributions, I might have reconsidered the advisability of my involvement. The deductability of contributions was after all, the major inducement for participation in the program and was the hook that conviced me and many others to become involved. Since congress saw fit to leave untouched the considerable penalty for early withdrawals (bless their hearts) I have retained my IRA and in fact make regular (nondeductable) contributions.

It has not gone unnoticed that for all converted accounts, taxes will be collected on a pot of money which otherwise would not become taxable until some distant future time. Perhaps it would not be overly cynical to suspect that the tax eaters in D.C. would be inexorably drawn to a much larger (and previously untaxed) pot of money sitting in all those Roth IRAs. It is also very easy to visualize a situation brought on by some budget crisis during which the considerable benefits of the Roth IRA would be curtailed. Everyone is talking about how the Roth IRA is the greatest thing since sliced bread. (Some would say too good to be true). Everyone is sharpening their pencils, reading the tax manuals and crunching the numbers. But all of this activity is being carried out with the unstated assumption that the Roth IRA will always exist in its current state. It ain't necessarily so. This approach may be hazardous to your wealth. Your Government asks you to make long term commitments when you enter these programs. Your elected represenatives however, operate with a considerably shorter time perspective.

Every time I have ever lost money, it has been when I have lost personal control. Years downstream, it may be that the greatest benefit of the Roth IRA is that it diverted the attention of the tax eaters from the traditional IRA and which would therefore have become a more dependable (stable) vehicle for the planned accummulation of wealth. As for now, I think I will stand pat. For me, it is a case of "once bitten, twice shy" Or, as I have previously stated, you can....FoolMeOnce>>

Super post! I would quibble with your thoughts only on some minor issues. I for one have said the Roth probably will be gone in five years. Like you, I believe the money-starved ghouls in our nation's capital won't abide untaxed honey pots for long. Unlike you, though, I don't think they will impose new taxes for those Roth IRA already established at the time the present law changes. Instead, the lawmakers will simply prohibit the addition of new deposits and the creation of new accounts. Those who take advantage now will be grandfathered under the provisions of today's law but will be precluded from adding new money to those accounts. That's just one Fool's opinion FWIW. Congress, of course, can do anything it desires. It's just that I believe if they take away existing accounts there will be rioting in the streets and erstwhile leaders swinging in effigy from lamp posts. For those who wish to stay in office, taking the benefit away in total would be political suicide.

Look at today's IRA. It began in 1975 at 15% of compensation limited to a maximum of $1.5K, and if you were covered at all under an employer's plan you couldn't play. In 1982 the limit was increased to 100% of compensation up to a maximum of $2K regardless of retirement plan coverage through work. In 1987, the deductibility was changed based on active participation in an employer's plan, Adjusted Gross Income, and filing status. So the rules changed, but those rules were NOT applied retroactively. The changes were applied against future deposits.

Will the rules change for the Roth? IMHO, yes. The Congress giveth and the Congress taketh away. The Roth as it is now probably won't last long. But for those who use it today, the rules probably won't change for the account they establish today save the ability to make future contributions. Those who don't use it today will probably see the opportunity to do so vanish forever. Mama didn't promise us a rose garden and life comes without guarantees.

Ya makes your choices and ya lives with the results.

Regards.....Pixy

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Author: JimTitus Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1055 of 75340
Subject: Re: Roth Conversion? Date: 1/4/1998 6:49 PM
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<<So the rules changed, but those rules were NOT applied retroactively. The changes were applied against future deposits.

Will the rules change for the Roth? IMHO, yes. The Congress giveth and the Congress taketh away. The Roth as it is now probably won't last long. But for those who use it today, the rules probably won't change for the account they establish today save the ability to make future contributions.>>

This is certainly the assumption that most people operate under. Now once in awhile, it turns out that a loophole leaves people with more tax savings than the act contemplated, and they might change the rules. Depreciation recapture comes to mind. But tax laws would lose their effectiveness at shaping social policy if people thought that Congress would rescind tax benefits granted to people who do what the Congress had intended.

A more likely scenario is the indirect repeal of the benefits of Roth conversion. For example, if the income tax is repealed before you retire, or if rates are reduced drastically, then you will lose some or all of the benefits of Roth conversion, and it will be too late to recoup the costs.

My IRA only has about $10,000 and is partly after-tax anyway==so I am willing to take the chance. But if I had a large IRA based on conversion from a 401k, I would probably hedge by only converting half the IRA to Roth. I would also dollar-cost average the portion that was in equities over a 4-6 month period to minimize the risk of converting at a market peak.

Jim

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Author: oneplez Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1057 of 75340
Subject: Re: Roth Conversion? Date: 1/4/1998 10:42 PM
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Hey foolmeonce!

I concur with your thinking about future congressional tax eaters. But, in addition to future problems, I think there are enough with the present conversions to be wary!

I posted this note on the thirdage money forum since it applies primarily to old folks, but some of the younger crowd may be interested!

CAUTION - COSTS OF CONVERTING TO THE ROTH IRA

People with large IRA balances and into or close to retirement should review the following:

1. The extra income could push you into a higher tax bracket or cause you to lose tax breaks for some itemized deductions.

2. In addition, the annual inclusion of 25% of your Roth roll-over income for four years may also increase taxes on your Social Security benefits!

3. You must also consider that your state and city taxes will also rise unless local taxers are asleep.

4. Even spread out over four (4) years, the drain of paying all these taxes may be severe.

5. Taxes for the Roth roll-over, must be paid from a source, other than the roll over monies. Otherwise, the compounding period in the Roth would be too long and you lose any advantage. In addition, if you withdraw money from your IRA to pay these taxes you will be assessed an early withdrawal penalty! These could be concerns for older investors!

6. If you take money from another investment (I assume it's invested!) to pay the roll-over tax, you lose dividends, interest etc., from that investment! You also get to pay broker's fees - TWICE, once when you sell to roll over (broker's don't transfer securities, only money) your regular IRA and again when you purchase securities for your Roth IRA.

7. An overhaul of the tax system could have a major effect on many investments! Those thinking about opening a Roth IRA may want to wait until tax reform proposals firm up! Investors may lose the promised benefits from Roth IRAs since investment income in the current tax reform proposals is exempted from taxes.

8. Also, if your plans include buying a home, or condo in a retirement community or buying a vacation home, you must consider if you can afford monthly mortgage payments, since they may no longer be deductible. If the mortgage deduction remains under flat-tax proposals, homeowners might find it worth less. A National Sales Tax of course precludes tax deductions!

9. Some question whether to take up the government on an offer to convert an existing IRA to a Roth account. The downside is that you'll have to pay tax now on the existing account's taxable balance, although no penalty will be assessed for such a switch. But by getting the tax out of the way, you can collect all your IRA retirement income tax-free. For some, this choice is moot since it's available only to single or married people with no more than $100,000 of adjusted gross income.

10. Another difficulty in determining whether to convert to a Roth IRA is predicting future tax changes! Are the President or congress thru defining taxable income? Those old enough to remember, know that Social Security benefits were untaxed until Reagan decided to grab 50% of the distributions, now Clinton raised the ante to 85%. Originally, IRA deductions were deductible! Not now, except for low income wage earners.

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Author: rickisme Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1058 of 75340
Subject: Re: Roth Conversion? Date: 1/4/1998 10:49 PM
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Great post oneplez!

rickisme

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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: 1068 of 75340
Subject: Re: Roth Conversion? Date: 1/5/1998 7:27 PM
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Greetings, JimTitus, and welcome.

<<... once in awhile, it turns out that a loophole leaves people with more tax savings than the act contemplated, and they might change the rules. Depreciation recapture comes to mind. But tax laws would lose their effectiveness at shaping social policy if people thought that Congress would rescind tax benefits granted to people who do what the Congress had intended.

A more likely scenario is the indirect repeal of the benefits of Roth conversion. For example, if the income tax is repealed before you retire, or if rates are reduced drastically, then you will lose some or all of the benefits of Roth conversion, and it will be too late to recoup the costs.>>

Good post. And IMHO much closer to what may happen than anything else I've seen posted on this issue.

Regards....Pixy

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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: 1070 of 75340
Subject: Re: Roth Conversion? Date: 1/5/1998 7:33 PM
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Oneplez,

<<I concur with your thinking about future congressional tax eaters. But, in addition to future problems, I think there are enough with the present conversions to be wary!

I posted this note on the thirdage money forum since it applies primarily to old folks, but some of the younger crowd may be interested!

CAUTION - COSTS OF CONVERTING TO THE ROTH IRA

People with large IRA balances and into or close to retirement should review the following:

1. The extra income could push you into a higher tax bracket or cause you to lose tax breaks for some itemized deductions.

2. In addition, the annual inclusion of 25% of your Roth roll-over income for four years may also increase taxes on your Social Security benefits!

3. You must also consider that your state and city taxes will also rise unless local taxers are asleep.

4. Even spread out over four (4) years, the drain of paying all these taxes may be severe.

5. Taxes for the Roth roll-over, must be paid from a source, other than the roll over monies. Otherwise, the compounding period in the Roth would be too long and you lose any advantage. In addition, if you withdraw money from your IRA to pay these taxes you will be assessed an early withdrawal penalty! These could be concerns for older investors!

6. If you take money from another investment (I assume it's invested!) to pay the roll-over tax, you lose dividends, interest etc., from that investment! You also get to pay broker's fees - TWICE, once when you sell to roll over (broker's don't transfer securities, only money) your regular IRA and again when you purchase securities for your Roth IRA.

7. An overhaul of the tax system could have a major effect on many investments! Those thinking about opening a Roth IRA may want to wait until tax reform proposals firm up! Investors may lose the promised benefits from Roth IRAs since investment income in the current tax reform proposals is exempted from taxes.

8. Also, if your plans include buying a home, or condo in a retirement community or buying a vacation home, you must consider if you can afford monthly mortgage payments, since they may no longer be deductible. If the mortgage deduction remains under flat-tax proposals, homeowners might find it worth less. A National Sales Tax of course precludes tax deductions!

9. Some question whether to take up the government on an offer to convert an existing IRA to a Roth account. The downside is that you'll have to pay tax now on the existing account's taxable balance, although no penalty will be assessed for such a switch. But by getting the tax out of the way, you can collect all your IRA retirement income tax-free. For some, this choice is moot since it's available only to single or married people with no more than $100,000 of adjusted gross income.

10. Another difficulty in determining whether to convert to a Roth IRA is predicting future tax changes! Are the President or congress thru defining taxable income? Those old enough to remember, know that Social Security benefits were untaxed until Reagan decided to grab 50% of the distributions, now Clinton raised the ante to 85%. Originally, IRA deductions were deductible! Not now, except for low income wage earners.>>

These are valid considerations which really boil down to what we've been saying on these boards for some time: Conversion of existing IRA is NOT a cut-and-dried issue. Everyone must evaluate the concept and make a decision on their own.

Regards.....Pixy


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Author: HarryA One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1105 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 1:56 PM
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I've been watching this board for weeks now, hoping a thread like this one would appear and begin questioning some of the potential risks in converting to Roth IRA accounts (other than the obvious cost/benefit analysis).

Pixy's point is well taken--Congress creates the deductible IRA, a wonderful new savings plan with tax benefits for most Americans. Unfortunately, they don't have the self-control to resist sticking their fingers in it just a few years later to grab some of the cash they had deliberatly permitted to accumulate beyond the Treasury's immediate reach. The Roth IRA will probably be no exception.

My biggest fear is that it will be even worse this time. For example, I'm sailing along in the middle of the IRA ocean, having built up a sizable balance over the last 12 years, but am still 12 years away from the shoreline of retirement. The Roth worksheets we see everywhere all indicate I'm a prime candidate for full conversion (if I can cough up the dough to pay the taxes over the next four years). Won't I feel just like an all-day sucker if right after I stroke that last check, Congress passes a national sales tax or flat tax bill that would exempt all my future IRA proceeds from taxation anyway, even if I hadn't converted?

If I were a real cynic, I might believe that is the intent right from the start: juice current revenue by offering this "irresistable" conversion opportunity, while planning all along to render the Roth IRA moot a few years hence under new tax legislation (already being honed in those smokey back rooms). Of course, I don't really believe Congress is smart enough, farsighted enough, self-disciplined enough, or single-minded enough to pull such off such a grand con game by design, but does it really make any difference if the net effect is the same? I seriously doubt the IRS will be inclined to offer refunds to those of us who paid any "unnecessary" Roth conversion taxes but I must admit, my crystal ball is extremely cloudy on this topic. Any thoughts?

Just another skeptical Fool,
Harry A.




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Author: HarryA One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1106 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 2:16 PM
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Whoops! If I'd been reading this board chronologically instead of by threads, I'd have seen that rickisme already expressed most of my concerns a couple of days ago under "Rush to Roth".

Are we paranoid for fearing that converting to a Roth IRA might backfire on us? Maybe, but it certainly bears keeping in mind that Congress has demonstrated time and again their willingness to renege on whatever legislative promises they may have made previously, if doing so serves their current fiscal objectives.

Still skeptical and probably paranoid,
Harry A.


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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: 1112 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 2:50 PM
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Greetings, HarryA, and welcome.

<<My biggest fear is that it will be even worse this time. For example, I'm sailing along in the middle of the IRA ocean, having built up a sizable balance over the last 12 years, but am still 12 years away from the shoreline of retirement. The Roth worksheets we see everywhere all indicate I'm a prime candidate for full conversion (if I can cough up the dough to pay the taxes over the next four years). Won't I feel just like an all-day sucker if right after I stroke that last check, Congress passes a national sales tax or flat tax bill that would exempt all my future IRA proceeds from taxation anyway, even if I hadn't converted?

If I were a real cynic, I might believe that is the intent right from the start: juice current revenue by offering this "irresistable" conversion opportunity, while planning all along to render the Roth IRA moot a few years hence under new tax legislation (already being honed in those smokey back rooms). Of course, I don't really believe Congress is smart enough, farsighted enough, self-disciplined enough, or single-minded enough to pull such off such a grand con game by design, but does it really make any difference if the net effect is the same? I seriously doubt the IRS will be inclined to offer refunds to those of us who paid any "unnecessary" Roth conversion taxes but I must admit, my crystal ball is extremely cloudy on this topic. Any thoughts?>>

Good post! I agree the math analysis probably shows you're a good candidate for the conversion -- IF you pay the taxes from existing resources and IF there's no radical change in the tax laws. Something will happen on taxes, but what? I don't think the flat tax has a prayer nor do I believe a national sales tax will stand alone. But a combination of lower graduated income tax rates coupled with some kind of national sales tax may be the camel Congress invents. It really depends on how successful the various interests are in keeping their particulat ox from being gored. Your guess is as good as mine and as anybody else's. But, Hey.....My crystal ball is cloudier than most.

Regards....Pixy

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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: 1114 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 2:53 PM
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HarryA,

<<Are we paranoid for fearing that converting to a Roth IRA might backfire on us? Maybe, but it certainly bears keeping in mind that Congress has demonstrated time and again their willingness to renege on whatever legislative promises they may have made previously, if doing so serves their current fiscal objectives.>>

Nothing says there's anything wrong with being a tad skeptical or paranoid here. Congress giveth and taketh away at will. It is a risk that must be considered in the decision process.

Regards...Pixy

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1119 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 5:04 PM
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<<My biggest fear is that it will be even worse this time. For example, I'm sailing along in the middle of
the IRA ocean, having built up a sizable balance over the last 12 years, but am still 12 years away from the shoreline of retirement. The Roth worksheets we see everywhere all indicate I'm a prime candidate for full conversion (if I can cough up the dough to pay the taxes over the next four years). Won't I feel just like an all-day sucker if right after I stroke that last check, Congress passes a national sales tax or flat tax bill that would exempt all my future IRA proceeds from taxation anyway, even if I hadn't converted?>>

Hi Harry. As the initiator of this thread, I am more than sympathetic to your concerns. Anything can happen and you will have no control over the impact on your personal situation. Pixy believes that it is highly unlikey that the proceeds of Roth IRAs will be taxed retroactively and I for one believe that he is probably right. (I also thought George Bush would win the last election.) I fear that the myriad of tax advantaged retirement savings proposals spewing forth from D.C. have come more to resemble the glamorous offerings of a gambling parlor or a carnival barker's shell game than a series of soundly conceived, stable and dependable menu of savings vehicles. Gambling is not Foolish and I for one am not playing anymore.

Regards, FoolMeOnce

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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: 1120 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 6:33 PM
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FoolMeOnce,

<< (I also thought George Bush would win the last election.)>>

LOL. I did, too. Kinda scary, isn't it? :-)

<< I fear that the myriad of tax advantaged retirement savings proposals spewing forth from D.C. have come more to resemble the glamorous offerings of a gambling parlor or a carnival barker's shell game than a series of soundly conceived, stable and dependable menu of savings vehicles. Gambling is not Foolish and I for one am not playing anymore.>>

I for one still call it a calculated risk as opposed to a gamble. I also believe that when it comes to IRA conversions, they should be approached with great trepidation and care. These beasties are not for the faint of heart. OTOH, annual contributions are a no-brainer IMHO -- provided, that is, the money can stay there for five years or longer. The money at risk with contributions isn't great enough to cause me consternation at this stage of the game.

Regards....Pixy

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1121 of 75340
Subject: Re: Roth Conversion? Date: 1/7/1998 7:51 PM
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<< (I also thought George Bush would win the last election.)>>

LOL. I did, too. Kinda scary, isn't it? :-)

Did I say "last" election? Perhaps I should lower my sights and just shoot for having my money outlive my brain.

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1151 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 10:51 AM
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LOL!!!! You brought a picture to my mind of Clinton, Gephart, et. al. sitting in a smokey room, plotting to do away with the income tax. Not, I think, a likely possibility in this space-time continuum.

Your concern about them changing the rules, however, is a real possibility. Putting new money into a Roth IRA is a no-brainer---it's the best of the currently available alternatives. It's the conversion of old IRA into a Roth that's dicey.

A future Congress may make ROTH's effectively taxable, even though without touching the explicit rules. They could, for example, count a ROTH distribution as income when figuring a phase-out of a totally different tax break. They did this recently with Social Security--no explicit tax on the SS benefit, but taking the SS money caused another tax to increase. Same effect as an explicit tax, just a different methodology. Hmmm, a very real possibility, I think. Never underestimate a politicians desire to get his hands on your money.

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1152 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 11:06 AM
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<<Something will happen on taxes, but what? I don't think the flat tax has a prayer nor do I believe a national sales tax will stand alone. But a combination of lower graduated income tax rates coupled with some kind of national sales tax may be the camel Congress invents. It really depends on how successful the various interests are in keeping their particular ox from being gored. Your guess is as good as mine and as anybody else's.
But, Hey.....My crystal ball is cloudier than most.>>

Cloudy or not, you have past experience to guide you. Heck, Charlie Brown doesn't even need a crystal ball to know what's gonna happen when Lucy holds the football for him!

I see a very real risk that we'll wind up with an income tax AND a sales tax AND a V.A.T. tax.
Ray

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1155 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 11:44 AM
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<<Pixy believes that it is highly unlikey that the proceeds of Roth IRAs will be taxed retroactively and I for one believe that he is probably right.>>

Unfortunately, we can get screwed even so.

If, for example, Social Security and/or Medicare ever become means-tested (a very real possibility, IMHO), then having a ROTH will probably reduce your SS check. Guess what? Your ROTH won't be taxed, but the net effect will be the same as if it was.

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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: 1160 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 1:53 PM
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Ray,

<<Never underestimate a politicians desire to get his hands on your money.>>

Nor the politician's ability to do so in the most imaginitive ways created by man. :-)

Regards....Pixy


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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: 1161 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 1:56 PM
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Ray,

<<I see a very real risk that we'll wind up with an income tax AND a sales tax AND a V.A.T. tax.>>

Unfortunately, so do I. Couple that with the individual States' penchants to get into our pockets, too, and it can really get messier than it is today.

Regards....Pixy

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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: 1163 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 2:03 PM
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Ray,

<<If, for example, Social Security and/or Medicare ever become means-tested (a very real possibility, IMHO), then having a ROTH will probably reduce your SS check. Guess what? Your ROTH won't be taxed, but the net effect will be the same as if it was.>>

IMHO there's not a doubt in the world that at some point Social Security will be means tested for benefits above some minimum level and Medicare premiums will be increased for the "well-to-do." But that's not a reason to avoid the Roth for something else. All assets will be rung into the test, so it doesn't matter. The only way to avoid it will be to spend down the assets ala the methodology may used to use to qualify for nursing home care under Medicaid. And Congress closed the latter loop hole last year.

Regards....Pixy


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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1168 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 2:51 PM
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Yo, Pixy,
<<... not a doubt in the world that at some point Social Security will be means tested for benefits above some minimum level and Medicare premiums will be increased for the "well-to-do." But that's not a reason to avoid the Roth for something else.>>

Agreed, in part. For new money, a Roth is a no-brainer. For virtually all of us, there's no doubt that it's the best of the available alternatives.

But for old money (i.e., converting an ordinary IRA to a Roth IRA), we have two choices. If you convert, you pay tax now, and hope that you won't _also_ pay tax in the future. If you don't convert, you surely will pay tax in the future, but you don't pay any tax now.

Hmmm, now I'm scaring myself! Maybe I won't be quite so anxious to convert after all.
Ray

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Author: jvanscoy Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1177 of 75340
Subject: Re: Roth Conversion? Date: 1/9/1998 7:03 PM
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<<Hmmm, now I'm scaring myself! Maybe I won't be quite so anxious to convert after all.
Ray>>

Well, for me NOT converting my IRA to a Roth IRA is a no-brainer. I have worked many cases trying to convince myself that converting some or all of my IRA to a Roth was a good deal. What I have finally concluded is that for my personal situation, it is NOT a good deal.

Regards, Jim



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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: 1186 of 75340
Subject: Re: Roth Conversion? Date: 1/10/1998 12:24 PM
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Ray,

<<But for old money (i.e., converting an ordinary IRA to a Roth IRA), we have two choices. If you convert, you pay tax now, and hope that you won't _also_ pay tax in the future. If you don't convert, you surely will pay tax in the future, but you don't pay any tax now.

Hmmm, now I'm scaring myself! Maybe I won't be quite so anxious to convert after all.>>

LOL. And also agreed. But don't get too scared. For new contributions on which we've already paid taxes, the Roth (if ultimately taxed) will be no different than proceeds sitting in today's taxable accounts. The latter were also funded with after-tax money and have the potential to be taxed again via a flat tax, consumption tax, VAT, etc., when the proceeds are withdrawn as income. As to the conversion issue, it's a risk one must assess like anything else. And until I see FIRM tax proposals with an actual chance of passage begin to emerge from our illustrious leaders, I can't get too worked up about it. If I did, I would suffer from "paralysis of analysis" like so many who missed the last three years in the market.

Regards.....Pixy

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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: 1195 of 75340
Subject: Re: Roth Conversion? Date: 1/10/1998 12:58 PM
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Jim,

<<Well, for me NOT converting my IRA to a Roth IRA is a no-brainer. I have worked many cases trying to convince myself that converting some or all of my IRA to a Roth was a good deal. What I have finally concluded is that for my personal situation, it is NOT a good deal.>>

And for many it won't be regardless of what happens to taxes. We all have to evaluate for our individual situaltion. Generalities just won't suffice here.

Regards.....Pixy


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Author: edbaum Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1243 of 75340
Subject: Re: Roth Conversion? Date: 1/12/1998 9:44 PM
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I've waited a long time to make my first post, but this discussion has been the most informative and finely written one yet.

Everyone's points are well-taken: future legislative changes are unpredictable under all circumstances, and most of the effects of tax law changes tend to be unintended consequences.

I agree that this is the case. I would even go as far as to say that U.S. tax law is affected by so many variables (only a few of which have anything to do with sound policy or some rational long-term plan) that it begins to resemble a random process--especially in the short term.

And if that's the case, then one should think of new investment options like the Roth IRA as a form of diversification. Just like splitting your cash into two piles and buying two stocks, you stand to reduce risk while also possibly reducing return. If you're a Fool, you don't diversify just to say you did it; you diversify because you want to minimize risk while still using only sound, well-researched investment ideas.

So I propose doing the same with the Roth IRA, especially for people who already hold a traditional IRA (partially rolling that into a Roth would be a realization of the diversification I'm talking about). Ask the same questions: "Although I can never predict the future with certainly, and Fools care little about the near-term, am I more or less likely to do better if I partially or entirely switch to this new investment vehicle?" "Considering the limited amount I can predict about this vehicle's performance, can I make a rational decision about it at all?" "Would the increased diversification make much of a difference to me, emotionally and statistically?"

The frustrating part is that one can look up reams of data--some of which is actually based on solid research--when one has stock ideas. But trying to figure out anything about what Congress will do is not even worth attempting.

-edbaum

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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: 1249 of 75340
Subject: Re: Roth Conversion? Date: 1/12/1998 11:31 PM
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Greetings, EdBaum, and welcome.

<<I would even go as far as to say that U.S. tax law is affected by so many variables (only a few of which have anything to do with sound policy or some rational long-term plan) that it begins to resemble a random process--especially in the short term.>>

LOL. And so true, too. Thanks for a well-reasoned, cogent post.

Regards....Pixy

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Author: JWILSON Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1253 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 9:12 AM
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Well folks, maybe I am a cynic at heart if not in actuallity, but I think congress has already "got us" when we use the Roth IRA. By this I mean that when you use the deductable IRA, you pospone the taxes until you take out the money. With the Roth, you pay your taxes up front, so who comes out ahead here, why the IRS. Until someone can show me a really solid example of a Roth being a big advantage over the traditional IRA, I would rather keep the tax money in my pocket, and use it to fund a taxable, very aggressive, mutual fund and take my chances with "taxes" later.

OBTW, I don't give Congress credit for having enough guts to try to tax the Roths later on. They backed off taxation of Medicare years ago because of the outcry, and they would do the same here.

Regards, Jim

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Author: drbear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1256 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 2:59 PM
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<<I don't give Congress credit for having enough guts to try to tax the Roths later on. They backed off taxation of Medicare years ago because of the outcry, and they would do the same here.>>

Whether or not the Roth is a gift or a gimmick, at least it increases the appeal and flexibility of retirement accounts. Will it stay in the current tax free format? That's debatable. What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.

The traditional 3-legged stool of retirement funding relied on employer benevolance (defined benefit plans), government benevolance (Social Security), and our own savings. We could count on a steady (albeit modest) income in retirement. Now we're increasingly being asked to make our own decisions. Defined contribution plans are replacing (rather than supplementing) defined benefit plans. Vehicles like the IRA (regular and Roth) encourage us to increase our own savings.

Now what about Social Security? I have no idea what will happen when Congress finally gets around to reform, but with the ratio of payors to payees steadily dropping, something is going to give. (Can hardly wait for that debate to begin.) Will the payroll tax be increased, benefits taxed more aggressively, age requirement increased, eligibility be subject to need? It could be any or all, but the bottom line is that future retirees will ultimately see a lesser percentage of their retirement income coming from the government.
That takes us directly back to funding our own retirement. Political expediency and the (almost) balanced budget may have given birth to the Roth, but I believe in the long run, Congress will try to enhance retirement vehicles in order to ease the gradual withdrawal of Social Security benefits. I hope that means the Roth (or whatever else they come up with) will continue to look like a good deal in 30 years.
Unfortunately, my crystal ball is cloudy, but I also have a hard time believing my marginal tax rate will ever go down. Based on that, I'll be putting new money in and converting at least some of my IRA funds. I have my doubts about pre-paying the government, but I think the long-term trend will encourage this type of account.

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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: 1264 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:15 PM
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Jim,

<<OBTW, I don't give Congress credit for having enough guts to try to tax the Roths later on. They backed off taxation of Medicare years ago because of the outcry, and they would do the same here.>>

What? Certainly you don't mean our leaders are incapable of stupidity, do you? J

Regards….Pixy



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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: 1266 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:28 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1267 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:29 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1268 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:29 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1269 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:30 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1270 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:31 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1271 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:31 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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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: 1272 of 75340
Subject: Re: Roth Conversion? Date: 1/13/1998 8:31 PM
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Yo, Drbear.

<< What's not debatable is that we're all being asked to assume greater responsibility for financing our own retirement.>>

And it ain't gonna improve for the rest of my lifetime, either! Thus, like you, I am forced to trust that the Congress will continue to encourage this savings effort with some type of incentives.

Regards….Pixy


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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1322 of 75340
Subject: Re: Roth Conversion? Date: 1/15/1998 3:27 PM
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<I see a very real risk that we'll wind up with an income tax AND a sales tax AND a V.A.T. tax.>

Don't forget the wealth-tax. Like real-estate tax, it is some % of the amount you have, not what you earn (e.g., income tax) or spend (e.g., sales tax).

Actually, if I could trust the politicians (ROTFL), I would actually favor a wealth tax, provided that ALL other taxes were repealed, as being more fair. No deductions or exemptions. It could even be graduated, but a linear tax might be good enough.

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1323 of 75340
Subject: Re: Roth Conversion? Date: 1/15/1998 3:44 PM
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<<<Never underestimate a politicians desire to get his hands on your money.>>

Nor the politician's ability to do so in the most imaginitive ways created by man. :-)>

There is a club whose members compete to tell the best tall-stories. I think it is called The Liar's Club, but I am not certain of this. A few years ago, the national winner told the following tall story:

"It was so cold yesterday that I saw a politician standing on a street corner with his hands in HIS OWN pockets."

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