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First off, I am a huge advocate of funding a Roth with your $3,000 allotment each year. The reason? All the money inside is YOURS. Any capital gains or dividends you see is YOURS, not split between you and Uncle Sam.

Now, I have a TIRA as a result of rolling over a 401(k) into an IRA. I have left it sitting there until a time when it seems prudent to roll it over into a Roth. I think that time may be this year. I wanted to bounce a few ideas off of everybody here and get some comments.

First, a little background about me. I am currently toward the upper end of the 25% tax bracket, and don't see myself heading towards the 15% anytime in the foreseeable future. I am single, but even if I got married, I still find it unlikely that I would fall below the 25% level.

Second, I currently have ~$11k in the TIRA that would be the amount I am considering rolling over.

I did a cursory review of Publication 590 on IRAs, and couldn't find anything directly related to rolling over from a TIRA to a RIRA. I'm sure it's there somewhere, but I couldn't find it.

The way I understand it, when you roll over from a TIRA to a RIRA, you basically withdraw the funds from the TIRA, put them back into a RIRA, and then pay taxes at your marginal tax rate. For example, if I moved $10,000 from a TIRA to a RIRA, all $10,000 would be in the RIRA, but my tax liability would have just increased $2,500. Is that correct? If so, the idea would be to roll over as much $$$ as possible without moving into a different tax bracket, right?

Now, here's my thoughts on why this year might be the "perfect" year to roll over to a Roth.

1. Given that the 28% tax bracket starts at $68,800, I am very close to pushing that envelope with my income plus the ~$11k that I'm rolling over.

2. I don't think income taxes are going to get any lower. If Kerry gets elected, they will be on the rise probably (don't want to get into a political debate here, just stating the facts as I see them).

Things I am still debating:

1. The market has been on the rise lately, but will probably stay where it is for a few months (IMHO). I only get taxed on the total value of my TIRA at the time of rollover, right? So, I would theoretically hope for a bear market and then rollover a devalued amount to minimize taxes. I guess this would fall under "market timing" so maybe I should just wait for a specific dollar amount before rolling over (like $10k resulting in a $2,500 tax, right?). Your thoughts on this?

2. I am currently 28, and am looking at roughly a 30-year time span for tax rate fluctuations. Are income tax rates bottomed out in your opinion? The evidence I point to is our huge deficit we're running right now...something's gotta give eventually.

3. I currently live in Texas where there are no state or local income taxes. While I don't anticipate on moving anytime soon, anything can happen over a time span of decades.

4. Did I mess up any of the technicalities above? Do I actually understand the rollover process correctly?

5. Who is actually going to read this far down into this post.

Thanks in advance for your thoughts and input!

-Agg97
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Right on Agg97. You are doing fine. That Roth Rollover you are talking about is usually called a Roth conversion. Contact whoever you want to be custodian of your Roth and discuss it with them. You may do a total or partial Roth conversion provided you are within the require income limits. You seem to be OK. The limit for singles is about $100K.

When you do the Roth conversion, your custodian issues a 1099 advising you and the IRS of a taxable event. Its up to you to make sure those taxes are paid--usually as estimated taxes, unless you can arrange extra withholding somewhere--for example at your employer. Otherwise, you must pay by Jan 15 of next year. If you wait until Apr 15, you could be assessed a penalty if you are signficantly under paid. But if you ordinarily have a refund coming, that could cover the amount you owe.

You do want to pay the tax with tax paid dollars if you can. That way you keep the maximum amount in your Roth. Paying the tax from the IRA funds means a penalty distribution costing you 10% of the amount removed in added taxes.

Your guess on what is likely to happen with income tax rates in the future is as good as anyone elses. Yes, the deficits would seem to limit further tax cuts. However, economic recovery could help moderate that part and GWB if he gets reelected would like to cut taxes some more. Yes, if the Democrats win big, it would seem that tax increases are likely.

I wouldn't worry about market timing. If your TIRA funds are invested now in stocks and your Roth funds are moved to similar stocks, you have no real risk. Your cost position does not change. Moving to money markets and then investing gradually over a period of months or years avoids some of the risk, but you would be better off to merely do a series of Roth conversions and leave the funds invested in stocks in your TIRA until converted.

5. I did read all the way down to you "who" line.

Best of luck.
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Thanks, pauleckler for your encouragement and perspective.

Thanks especially for your warning about underpaid tax penalty, something I hadn't thought of. I guess I should ramp my withholding back down to 0 for the rest of the year if I plan to transfer all over this year.

Also, the thought of converting the money gradually is very appealing. I'll eventually remember "market timing bad, dollar cost averaging good."

-Agg97
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5. Who is actually going to read this far down into this post.

I don't think I could have said anything that paul did not cover very well so I will just pipe in that I read that far.

dt
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Agg, here are my thoughts:

First off, I am a huge advocate of funding a Roth with your $3,000 allotment each year. The reason? All the money inside is YOURS. Any capital gains or dividends you see is YOURS, not split between you and Uncle Sam

Yes, but it's after tax money, so you already split it (and all future gains, since what you paid in taxes can't compound) with Uncle Sam. Still, I agree it's nice to know a Roth will never be taxed.

1. Given that the 28% tax bracket starts at $68,800, I am very close to pushing that envelope with my income plus the ~$11k that I'm rolling over.

Right- you convert enough to reach the next income bracket. That's what I do with my mother's money each year. A sound plan.

2. I don't think income taxes are going to get any lower. If Kerry gets elected, they will be on the rise probably

Unless Kerry is as fiscally irresponsible as the current administration, I agree. You can't live on borrowed funds forever.

1. The market has been on the rise lately, but will probably stay where it is for a few months (IMHO).

You have no idea what the market will do in the next few months- not the first clue. That's based on the future trading decisions of millions of people.

3. I currently live in Texas where there are no state or local income taxes

That's a point in favor of converting to a Roth. I live in high tax California and am thinking of moving to a state like Texas for a year just to do a Roth conversion.

Bottom line- Roth conversions are a good idea when you pay the taxes with taxable money and don't think your tax rate will be much lower in retirement than it is now. You're effectively moving money from taxable to tax sheltered accounts. While you account balance doesn't change after the conversion, it's value does, since it's now tax free.

Nick
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Unless Kerry is as fiscally irresponsible as the current administration, I agree. You can't live on borrowed funds forever.

You can't pin the budget on the President alone. Congress votes for it, so Congress is very responsible. People tend to forget this.
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Yes, but it's after tax money, so you already split it (and all future gains, since what you paid in taxes can't compound) with Uncle Sam. Still, I agree it's nice to know a Roth will never be taxed.

True. The point I try to explain to people is that a Roth is after-tax dollars while a TIRA is before-tax dollars. Either way, the limit is $3,000. So, the $3k under a Roth is a lot more powerful than the $3k under a TIRA. When you start taking capital gains and dividends into account, that extra money inside the Roth makes a HUGE difference.

When we talk about converting a TIRA to a Roth, it's just a game of current income tax rates versus future income tax rates. Everything else in the game is equal, so you've gotta be up on your politics and history to make an informed decision on when to convert.

You have no idea what the market will do in the next few months- not the first clue. That's based on the future trading decisions of millions of people.

Granted. I like pauleckler's idea of basically dollar cost averaging the conversion over several months.

Thanks for your thoughts, Nick.

-Agg97
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You can't pin the budget on the President alone. Congress votes for it, so Congress is very responsible. People tend to forget this.

Yes, and so are the American people who elect everyone. But the president is by far the single most responsible person, especially in an evenly divided congress. He creates the budget, and can veto the final version.

Nick
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You can't pin the budget on the President alone. Congress votes for it, so Congress is very responsible. People tend to forget this.

Yes, and so are the American people who elect everyone. But the president is by far the single most responsible person, especially in an evenly divided congress. He creates the budget, and can veto the final version.

Nick


Yes, but if Congress doesn't vote for it, it doesn't become a law. People worry about corporate governance. How about national governance?
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When you do the Roth conversion, your custodian issues a 1099 advising you and the IRS of a taxable event. Its up to you to make sure those taxes are paid--usually as estimated taxes, unless you can arrange extra withholding somewhere--for example at your employer. Otherwise, you must pay by Jan 15 of next year. If you wait until Apr 15, you could be assessed a penalty if you are signficantly under paid. But if you ordinarily have a refund coming, that could cover the amount you owe.

We converted half of our traditional IRA to a Roth last year, and I didn't know that you have to pay taxes by Jan 15! Where can I read about this? We have converted the rest of the money this year, so we will owe taxes next year. We were penalized $19 this year for underpayment of taxes. Not a big deal, but I want to be better informed this year!
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Agg97, I agree with most of your comments. One clarification:

When we talk about converting a TIRA to a Roth, it's just a game of current income tax rates versus future income tax rates. Everything else in the game is equal

Keep in mind all else is not equal. When you do a Roth conversion and pay the taxes from outside the Roth, you're increasing your tax sheltered investments on an after tax basis. So, holding tax rates equal, you would always want to do the Roth conversion.

Nick
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When we talk about converting a TIRA to a Roth, it's just a game of current income tax rates versus future income tax rates. Everything else in the game is equal

Keep in mind all else is not equal. When you do a Roth conversion and pay the taxes from outside the Roth, you're increasing your tax sheltered investments on an after tax basis. So, holding tax rates equal, you would always want to do the Roth conversion.


Yes, I agree with that statement, your tax shelter increases in after-tax value. But you then have to account for the opportunity cost of the after-tax money you used to pay for the taxes.

I think the statement still holds that if you expect your income tax rates to be lower during retirement, there's no compelling reason to convert existing money from a TIRA to a Roth. (Of course, new contributions should definitely be a Roth if you qualify, which was the very beginning paragraph of this thread.)

For instance, if I could pay 25% in taxes now, or possibly 20% in the future, waiting for the future is the way to go. However, I think 25% is near the bottom if not THE bottom of my income tax rate over my working career, so I am looking to convert it this year.

-Agg97
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I am now 66 years old. I did not open a Roth IRA when they first became available because I did not believe Congress could be so generous -- NEVER pay taxes on the accumulated earnings? No way those greedy SOBs would ever allow that. I was wrong.

During the period 1982 to 1986 I sent annual checks for two thousand dollars to a mutual fund for a spousal IRA for my wife who is seven years older than I am. That is a total of $10,000 in contributions. We started drawing when she got to the 70.5 mandatory age. She has drawn about $25 K and has about $75 K left. I got a tax deduction for the $10 K in contributions, but I would much rather have put in $10 K after tax and never pay taxes on the $90 K increase during the "compounding" period and not be required to make withdrawals.

I retired in 1999 and rolled the balance in my company 401(k) into a rollover IRA. I have been moving about $10 K per year from my traditional IRA to a Roth Conversion IRA in the hope that (1) the earnings from date of conversion to when I draw from it will be significant and never taxed (2) the taxes have to be paid someday so why not now and (3) there is no mandatory withdrawal requirement for Roth IRAs. The risk is that there will in fact be a loss, but life is full of risks.
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Yes, the lack of manatory withdrawals is a key benefit of the Roth, as is the fact that Roth withdrawals don't count as income for Social Security taxation purposes.

On the other hand, once I'm in my 70's I probably won't mind withdrawing 5%-10% from my TIRA per year and living it up a bit. You can't take it with you.

Nick
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You can't take it with you.

Nick


+++
+++


But with a Roth, you can leave it tax free.

;-)


sunray
& that's my plan


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ggg,

The last estimated tax payment is always due by Jan 15th on estimated income for the prior year. Perhaps you were thinking of this IRA transaction as something 'separate' to which the general rule did not apply, but as you have learned, this is not the case. Withdrawals from a traditional IRA to be converted into a Roth IRA are included in ordinary income, therefore the estimated taxes on those withdrawals are due by Jan 15th. (If you haven't already allowed for it elsewhere, as in payroll withholding.)

If you want chapter and verse on where you might find this in the tax code and/or publications, you might try the Tax Strategies board where one of those knowledgeable folks will know where to find it.

2old
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You can't take it with you.

Nick

+++
+++


But with a Roth, you can leave it tax free.

;-)


sunray
& that's my plan

But look out. The Estate Tax man and in your state the Inheritance Tax man can still collect. So plan ahead.

Leaving stuff behind creates such messes. You really should spend it all.
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