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Subject:  Re: RMDs for Roths? Date:  3/12/2014  9:18 AM
Author:  2gifts Number:  74499 of 90433

If you are disciplined and invest with a view towards minimizing taxes, a regular account can accomplish similar benefits to an IRA without the restrictions. Yes, you can't day trade in those accounts without serious tax consequences. However the step up in basis will let your kids inherit tax free, (at least at our relatively modest levels,) and you retain control over when you cash in the stocks without those pesky RMDs. Further, the capital gains are taxed preferentially rather than at regular income. I have some bias, as we had very few years where we got the tax break for putting into a TIRA, but very long ago and now those investments and those of the 401K have grown to the point where we will pay a higher tax bill if we let it ride to 70.5 and RMDs, than had we simply put it in a taxable account. And the Roth was only available to us for a few years. Yes, too much money is a fine problem to have. We worked hard for it and saved hard for it, so no apologies here.

Your complaint seems to be that you never want to pay any taxes on that money, and I think that was never a likely scenario. You took the tax deduction when you made those contributions to the TIRA knowing that all those dollars would be taxable when they were taken out, and all at ordinary income rates. It was never supposed to be a free ride for those dollars, and you are now realizing that.

But times have changed. So for our kids why question tax deferred accounts? 401Ks up to match, fine. Better yet, hopefully Roth 401Ks will be available to them. Roths, great. Eldest at 19 already has about $12K in his, just started Youngest's with about $600 this year. If they can't take a Roth and only qualify for TIRA without tax break? Probably not. Keep it in taxable. This was our mistake, thinking we would be able to pass it on to the next generation in a tax advantaged manner. We are stuck now, and if I don't want RMDs to the extreme, we need to convert what we can to Roth before we take SS. Hopefully all this concern is noise, and it will not be our accounts that can not be inherited as promised, or they will be grandfathered, but the writing is on the wall for our kids.

I don't actually see this as being stuck. I see this as the time has come or is coming when you have to pay taxes on those dollars that you always knew would owe taxes when they came out of the tax-advantaged account. I don't see this as a change at all, and I have to say that I don't see the huge difference between you paying taxes on those dollars now vs. your kids paying taxes on those dollars later when they withdraw them. Either way, taxes have always been due upon withdrawal, and you will have the ability to pay those taxes from that money that is withdrawn.

I am not seeing this as some awful penalty that needs to be paid.

That said, I never put money into a TIRA as a contribution after the first year or two, but I have rolled money over from a 401k into the TIRA. And one of the reasons that I opted to keep the vast bulk of our savings in a taxable account was because I knew we'd be paying capital gains, and those rates (under current tax law - I can only plan for current law and can adjust when the tax laws change) are lower than paying ordinary taxes on money coming out of a tax-advantaged account.

Our primary goal is spending it all, even if that means paying for our eventual grandkids' college.

My college roommate's boyfriend-now-husband had a grandmother who was fairly wealthy. One thing that she did to minimize her estate was to pay the first year of college for every grandchild. I always thought that was a pretty neat idea, and I would love to be in a similar position when I have grandchildren attending college. Like you, though, we plan to spend every penny, and the kids consider their paid-in-full college tuition as their inheritance. Anything else will be gravy for them. And like you, realistically there will be something left over for them, and so perhaps we will also be paying for our grandchildren to attend college.

I do see all your concerns about minimizing taxes, and I do agree that that is a good goal. However, I would be careful about letting the tax tail wag the dog as you go through your planning.

We are a couple of years behind you as I plan to retire in 2017, so I'd love to see how all of this plays out for you, and hope you post more on your journey in planning for your retirement as well as how things work for you in the early years.

I am learning a lot from these discussions.
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