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Author: jmbooth2000 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75701  
Subject: Tax implication of roth conversion Date: 4/17/2010 8:56 PM
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All,

I'm looking into the possibility of converting a IRA to a ROTH IRA this year. At first glance this seemed like a good idea (I expect to be in a equal tax bracket in retirement and I'm betting tax rates will rise). I ran one of the calculators and sure enough it showed that I would be ahead by a small amount even if tax rates remained the same.

The problem is when I looked at my tax return I realized that I'm already loosing part of the Child Tax credit (I have 2 children which equals 2000 but as my AGI was just over 112000 I lost 150 of this credit). If I'm reading things correctly the ROTH conversion essentially counts as additional income so I will loose even more of the child tax credit. In order to make an accurate choice I need to take into account the lost child tax credit.

I guess my question is are there any other credits I should be aware of that I might be in danger of loosing and has anyone seen a spreadsheet / calculator that takes the tax implications into account?

I may choose to do the conversion anyway on the basis that I suspect taxes will rise and even if I stay in the same bracket I'll be worse off.

Thanks
Jonathan
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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66962 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/17/2010 9:10 PM
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If I'm reading things correctly the ROTH conversion essentially counts as additional income so I will loose even more of the child tax credit. In order to make an accurate choice I need to take into account the lost child tax credit.


Absolutely IRA to Roth conversion counts as More Ordinary Income.

what that does to child credits, i don't know.



I guess my question is are there any other credits I should be aware of that I might be in danger of loosing and has anyone seen a spreadsheet / calculator that takes the tax implications into account?


what *i* did -- i use turbo tax, got an early version and used it (in Nov.) to run "what-ifs" over Conversion. for me, more income meant more SS taxed .

if it affects credits, that's another complication,
if it could get you into AMT ,that would be another.. difficult for a simple spreadsheet to handle all that.



there's a Tax Strategies board where you might get a better answer

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66963 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/18/2010 9:10 AM
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Johnathan I encourage people to be aware of tax issues, but do not let taxes determine what you do with regard to investments -- I am making the assumption you do not have net worth of millions and/or AGI in excess of $300K.

There is one very key issue about the Roth conversion deal that dominates the economics for most people. How long will the Roth IRA funds exist before they are withdrawn? Unless the funds are going sit for decades (like at least 20 years) before withdraw it is unlikely you will gain anything and you may be worse off.

Big obvious exception, people who will never need/use the Roth funds for retirement and want to use a Roth as an estate planning tool.

No one really knows what the tax or other situations will be like 10 years in the future. So get out your spread sheet and last year's 1040. Take the funds in your IRA, add them to your income, calculate State and Federal Income tax changes. Next assume some compound rate of return on the Roth Funds. That is the easy part. Take you Current IRA and apply the same compound growth rate.

If you never touch the IRA or Roth funds the comparison is easy. But if you want to pull funds out for retirement you will need to pick a year withdraws start and compare the two options.

Do not forget State and local taxes - in some locals they may apply.

Just to throw one other big unknowable into the mix - like it or not one of two things will have to happen in the next 10 to 15 years.

#1 The major federal spending area will seriously slow their rates of dollar growth. (Medicare, Medicade, Defense -- any of these will mean large number of people loosing their jobs because of the amount of cuts needed)

#2 Significant Tax increases - increasing the tax rates or adding new taxes such as a VAT.

My personal estimation in item #2 is a combination of a VAT plus a serious re-write of the current tax code. If things like the home mortgage deductiblity, farm price supports, oil depletion allowances, elimination of AMT, were removed/reduced in a tax code re-write, even guessing your tax status 20 years forward is folly.

Gordon
Atlanta

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Author: isawbones Big red star, 1000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66964 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/18/2010 10:27 PM
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The answer depends on a lot of variables.

Will the money to pay the additional tax come form the IRA or savings outside the IRA? The real benefit of conversions comes if you use money outside the IRA to pay the taxes.

How many years until you stat withdrawing the money?
The Longer the time, the more sense it makes to convert.

If we get a VAT and lower income tax rates as a compensation, then conversion is a disaster.
There are lots of IRA conversions calculators on the web. I would use several and compare the results
And of course as you pointed out, how many current deductions will you lose by being put into a higher bracket by doing the conversion.

Who knows what congress will cook up over the next 10-20 years?

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66965 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/19/2010 12:52 PM
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>> If we get a VAT and lower income tax rates as a compensation, then conversion is a disaster.
There are lots of IRA conversions calculators on the web. I would use several and compare the results
And of course as you pointed out, how many current deductions will you lose by being put into a higher bracket by doing the conversion.

Who knows what congress will cook up over the next 10-20 years?
<<

Which, IMO, is why diversification is not only important in terms of one's asset allocation but also in terms of holding accounts with varied tax treatment (taxable accounts, Roth vehicles, traditional IRA/401Ks). I have no idea what the tax laws will be when I withdraw, but by owning a considerable chunk in all these types of accounts I have the best chance of "engineering" a way to generate income that minimizes taxes.

#29

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Author: dennisk101 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66971 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/20/2010 2:19 PM
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The real benefit of conversions comes if you use money outside the IRA to pay the taxes.

Can one avoid using outside money to pay the taxes on conversion without paying a penalty for early withdrawal? Or, to put it in a less convoluted form, won't the taxpayer be subject to a penalty if he or she uses money from the IRA to pay the taxes on conversion?

Dennis

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66972 of 75701
Subject: Re: Tax implication of roth conversion Date: 4/20/2010 2:30 PM
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The real benefit of conversions comes if you use money outside the IRA to pay the taxes.
---------------
Can one avoid using outside money to pay the taxes on conversion without paying a penalty for early withdrawal? Or, to put it in a less convoluted form, won't the taxpayer be subject to a penalty if he or she uses money from the IRA to pay the taxes on conversion?



almostt certain the penalty is IF (and only if) you're under 59.5 yrs

what they're saying is you get no benefit from a conversion if you can't pay the taxes (which occur regardless of age) 'from' the conversion.


eg:

you want to convert 10,000. which incurs ,say, 3,000 of tax.

IF you can move all 10k to the Roth and pay the 3K from other funds, there MIGHT be an advantage.
but if you move only 7K (to Roth) and use the other 3K for taxes, you LOSE out in the end


=

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