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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Re: Roth conversion complicated by other factors Date: 2/26/2001 3:16 PM
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TMFPixy:

JAFO writes:

<<<<Individual 1 borrows from retirement plan, at 8%, and repays --- using after-tax dollars. When those dollars are withdrawn, the the withdrawal is subject to income tax.

Individual 2 (twin brother to individual 1) borrows from a bank, unsecured, personal loan in same amount as indiviudal 1. Dollars left in the plan that were not borrowed are invested in corporate bond paying 8%. When bank loan is repaid, after-tax dollars are again used to make the payment. When the dollars are withdrawn from the retirement plan, those dollars are taxable.>>>>

"Individual 2 is NOT borrowing HIS OWN money and is NOT paying himself interest, whereas Individual 1 is."

Agreed.

"Therefore, IMHO it is complete lunacy to attempt to claim there is no double taxation issue here."

I did not claim that there was no double taxation, I said it was irrelevant. Dollars are fungible; if you look at my two indiviudals (and further assuming that each is in the same tax bracket at all times), there is no difference between cash flow or total taxes paid by either indiviudal - that is why I consider it irrelevant. The net after-tax dollars available to each is the same --- why would either care which scenario gnerated it.

As I acknowledged before, if you make the loan interest for indiviudal 2 deductible - home equity, margin, etc. or you change the investmetn result for individual 2 (Opportunity cost), you can vary the result --- but the result is varying for some reason other than the double taxation.

"However, I can see we will never agree on that issue, so I also concur that the argument is much ado about nothing."

Probably, but I can always hope.

"The idiot shouldn't borrow from a tax deferred plan to begin with. :-)"

As a general rule, I agree. I just do not think that the rule is absolute. <grin>

"And FWIW I think your or my memory is failing for I recall no such conversation or debate with you before on this issue. Not that it would have gone any differently, though. :-)"

It could be my memory, or maybe it was TMFTaxes and not you. As best as I can recall, I have had this discussion with one of the pro TMFs.

Regards, JAFO


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