The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Retirement Investing


Subject:  Re: Poll: Did your 401k recover from the 2008 de Date:  12/27/2010  8:30 PM
Author:  JAFO31 Number:  67975 of 98008

madbrain: "
As for why not to invest all the money aggressively in stocks immediately, it comes down to timing of the taxes:

1) if the value declined significantly before the rollover to Roth, I might have a large capital loss."

I thought these funds were in an after-tax 401-k? Why discuss a capital loss? What happens in the 401-k, generally stays in the 401-k.

"Possibly larger than the $3000 that I can deduct annually."

If my understanding is correct (i.e., that the dollars we are discussing in a 401-k), why is htis even relevant?

"I have zero capital gains to offset since all my investments are in retirement accounts, so having capital losses doesn't do me much good and might spill over to another year. Maybe to a tax year during which my income and tax bracket would be lower and the capital loss wouldn't be worth as much."

I am not following any of this paragraph.

"2) if the value increased significantly before the rollover to Roth, I might have a paper gain, and I would have to pay the taxes on that gain at a high rate of 38% combined federal/state immediately at rollover time."

It is only a paper gain if you do not sell immediately after the roll-over (or immediately before the roll-over, for that matter).

"This would be a short-term gain (less than 1 year) since I plan to do a rollover to Roth of my after-tax contributions every year."

Why is this relevant? The funds are in a 401-k plan, right?.

"Then the money would go to Roth in similar investments (aggressive stocks)."

Only if you do not sell. Nothing requires that the investment be the same after the roll-over.

"If the value then declines afterwards, there is no possibility of ever taking a loss on those."

Generally not.

"I plan to only withdraw the money at retirement time anyway, during which I presumably will be in a lower tax bracket so the capital loss by then wouldn't be worth as much as the taxes that were paid upfront."

What capital loss is there to take? Once it is in the Roth, the account does not generate capital losses that can be offset againt capital gains (or ordinary income, up to the $3,000 annual limit and carry forward until death.

And gettin back to my original point, unless limited by dollars outside the rollover amount to pay taxes and choosing to avoid the penalty that arises from using a portion of the rollover to pay taxes, I fail to see why $x contributed and rolled over is better than $x contributed and $y earned during the interim both being rolled over. There is more in the Roth in the latter scenario.

And if the "38% combined federal/state [tax rate due] immediately at rollover time" unnerves you, then perhaps there should be no roll-over at all.

Many of the people on these boards like the idea of multiple pots of money with different tax consequences - Roth IRA / Traditional IRA/401-k / after-tax accounts with capital gains and losses and dividend income, so that they can mix and match income streams and take advantage of the standard deduction and personal exemption amounts available to them. Having insufficient taxable income to use all of those amounts is effectively leaving money on the table, because they are annual, use it or lose it, options (that are not cumulative).

Regards, JAFO
Copyright 1996-2020 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us