I read on one of the other posts that you have the option of taking all the tax hit in 1998 for a Roth conversion or spreading it out over 4 years. My question is, why would you want to take it all in one year? I thought popular opinion was that it was like Uncle Sam giving you a 4 year interest-free loan to spread it out?
If your tax rate is going to go up in the 2nd, 3rd, and/or 4th year of your conversion, you may want to pay all of the taxes in the first year. This would lower your overall tax hit - especially if your income increases significantly.
[[I read on one of the other posts that you have the option of taking all the tax hit in 1998 for a Roth conversion or spreading it out over 4 years.]]Righto...[[ My question is, why would you want to take it all in one year? I thought popular opinion was that it was like Uncle Sam giving you a 4 year interest-free loan to spread it out?]]That's basically true IF your future tax rate will not increase relative to your 1998 marginal tax rate.Lets say that you will be in the 28% rate in 1998, but expect to be in the 39% rate in years 1999, 2000, and 2001. It is very likely that you'll want to take the tax hit in 1998. Even with the "interest free loan" component of taking the tax hit over a number of years, it is very likely that you'll not recoup the additional taxes that you'll pay over the next three years. So if you are reasonably certain that your marginal tax rate will be the same or less over the next three years, then the spread out is a "no brainer". But if you anticipate your marginal rate to rise in the future, the issues become much more complicated.Hope this helps...TMF TaxesRoyWant to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
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