I’m out again

[PatentGuy]

Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.

Regarding equities v. cash, maybe I don’t understand what you mean, but I thought this was account-based. For example, we have an IRA account funded through the years by a couple of rollover 401ks from past employers. The money within the IRA account, for better and worse, is invested in several different equity funds. If we sell the funds and buy T-bills, or the like, the monies are still under the “umbrella” of the same IRA account.

Setting aside my complete lack in trust of government (out of its demonstrated ineptness more than anything else) I’m still not convinced paying the taxes now makes sense. Help me with the math (or the meth, if need be for understanding the numbers).

In addition to the IRA, I have a current 401K (all before tax contributions), plus my wife is a teacher, and we pump the full amount allowed each year into each of her 403b and 457k plans. As far as I know, these are the same as 401ks in the eyes of the IRS.

We are in the max tax bracket (net incremental Fed and Cal is around 42% excluding SEF taxes which are not avoided by these plans). If we “convert” one or more of our existing IRA, 401k, 403b, 457 accounts to after-tax Roth status by paying the taxes in a lumpo sum, can we continue to contribute the same annual amounts to the accounts “after tax” from now on, despite our income being over the traditional Roth limits?

Or, can we just “convert” what we have in the pot as of Jan 1, 2010, and then go back to before-tax contributions (making for an accounting Cluster Shucks situation by the time we retire)?

I’ll take all free advice from anyone who has some insight on this stuff. Thanks.

[PatentGuy]

To be clear – what I meant in my first post about staying in equities was that I was less concerned if they drop in value, since the goverment pays 42% of any loss. Yes, I still pay 58% of it …

[PatentGuy]

To be clear – what I meant in my first post about staying in equities was that I was less concerned if they drop in value, since the goverment pays 42% of any loss. Yes, I still pay 58% of it …

[PatentGuy]

To be clear – what I meant in my first post about staying in equities was that I was less concerned if they drop in value, since the goverment pays 42% of any loss. Yes, I still pay 58% of it …

[PatentGuy]

To be clear – what I meant in my first post about staying in equities was that I was less concerned if they drop in value, since the goverment pays 42% of any loss. Yes, I still pay 58% of it …

[PatentGuy]

To be clear – what I meant in my first post about staying in equities was that I was less concerned if they drop in value, since the goverment pays 42% of any loss. Yes, I still pay 58% of it …

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.
[/quote]

My understanding is that it is based on 2010 rates, you just get to defer the payment to 2011 and 2012. The rationale is the encourage up-front conversions. You should check with your tax advisor though.
I am a CPA and CFA, but I don’t practice in the tax or investment areas.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.
[/quote]

My understanding is that it is based on 2010 rates, you just get to defer the payment to 2011 and 2012. The rationale is the encourage up-front conversions. You should check with your tax advisor though.
I am a CPA and CFA, but I don’t practice in the tax or investment areas.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.
[/quote]

My understanding is that it is based on 2010 rates, you just get to defer the payment to 2011 and 2012. The rationale is the encourage up-front conversions. You should check with your tax advisor though.
I am a CPA and CFA, but I don’t practice in the tax or investment areas.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.
[/quote]

My understanding is that it is based on 2010 rates, you just get to defer the payment to 2011 and 2012. The rationale is the encourage up-front conversions. You should check with your tax advisor though.
I am a CPA and CFA, but I don’t practice in the tax or investment areas.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Thanks for your response(s). I agree regarding the non-use of the funds to pay the taxes, but regarding splitting the tax bill with 2011, that will likely be a loser for us since the GWB tax rates expire and the Obama et al tax rates (and surcharges) will kick in. Probably makes more sense just to pay the bill in 2010.
[/quote]

My understanding is that it is based on 2010 rates, you just get to defer the payment to 2011 and 2012. The rationale is the encourage up-front conversions. You should check with your tax advisor though.
I am a CPA and CFA, but I don’t practice in the tax or investment areas.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Setting aside my complete lack in trust of government (out of its demonstrated ineptness more than anything else) I’m still not convinced paying the taxes now makes sense. Help me with the math (or the meth, if need be for understanding the numbers).[/quote]

So let’s say you have $10,000 today. If you convert to Roth and pay 30% tax from the funds today, you have $7,000. 10 years from now at 10% per year, that will be worth $18,156.

Keep the same $10,000 without conversion, it will be worth $25,937 in 10 years at 10%. After tax, it is worth $18,156 at 30% tax – same as if you paid the tax today.

Conclusion: Assuming constant tax rates, paying the tax now or paying the tax later is mathematically equivelant. If you think taxes will be higher in the future, you are better off paying them now.
************************************
Next, convert to Roth and pay the 30% or $3,000 tax from other funds that you might have spent on non-productive spending (entertainment, etc.). In 10 years at 10% you have $25,937 Tax Free or $7,781 more than the other scenarios. Even if Obama is still in office when you retire, the gov’t is probably not going to tax Roth’s at 30% (which would get you even with the other scenarios). I bet they will add a Roth Tax in the next 20 years, but more like 5-10%. We’ll see.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Setting aside my complete lack in trust of government (out of its demonstrated ineptness more than anything else) I’m still not convinced paying the taxes now makes sense. Help me with the math (or the meth, if need be for understanding the numbers).[/quote]

So let’s say you have $10,000 today. If you convert to Roth and pay 30% tax from the funds today, you have $7,000. 10 years from now at 10% per year, that will be worth $18,156.

Keep the same $10,000 without conversion, it will be worth $25,937 in 10 years at 10%. After tax, it is worth $18,156 at 30% tax – same as if you paid the tax today.

Conclusion: Assuming constant tax rates, paying the tax now or paying the tax later is mathematically equivelant. If you think taxes will be higher in the future, you are better off paying them now.
************************************
Next, convert to Roth and pay the 30% or $3,000 tax from other funds that you might have spent on non-productive spending (entertainment, etc.). In 10 years at 10% you have $25,937 Tax Free or $7,781 more than the other scenarios. Even if Obama is still in office when you retire, the gov’t is probably not going to tax Roth’s at 30% (which would get you even with the other scenarios). I bet they will add a Roth Tax in the next 20 years, but more like 5-10%. We’ll see.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Setting aside my complete lack in trust of government (out of its demonstrated ineptness more than anything else) I’m still not convinced paying the taxes now makes sense. Help me with the math (or the meth, if need be for understanding the numbers).[/quote]

So let’s say you have $10,000 today. If you convert to Roth and pay 30% tax from the funds today, you have $7,000. 10 years from now at 10% per year, that will be worth $18,156.

Keep the same $10,000 without conversion, it will be worth $25,937 in 10 years at 10%. After tax, it is worth $18,156 at 30% tax – same as if you paid the tax today.

Conclusion: Assuming constant tax rates, paying the tax now or paying the tax later is mathematically equivelant. If you think taxes will be higher in the future, you are better off paying them now.
************************************
Next, convert to Roth and pay the 30% or $3,000 tax from other funds that you might have spent on non-productive spending (entertainment, etc.). In 10 years at 10% you have $25,937 Tax Free or $7,781 more than the other scenarios. Even if Obama is still in office when you retire, the gov’t is probably not going to tax Roth’s at 30% (which would get you even with the other scenarios). I bet they will add a Roth Tax in the next 20 years, but more like 5-10%. We’ll see.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

Setting aside my complete lack in trust of government (out of its demonstrated ineptness more than anything else) I’m still not convinced paying the taxes now makes sense. Help me with the math (or the meth, if need be for understanding the numbers).[/quote]

So let’s say you have $10,000 today. If you convert to Roth and pay 30% tax from the funds today, you have $7,000. 10 years from now at 10% per year, that will be worth $18,156.

Keep the same $10,000 without conversion, it will be worth $25,937 in 10 years at 10%. After tax, it is worth $18,156 at 30% tax – same as if you paid the tax today.

Conclusion: Assuming constant tax rates, paying the tax now or paying the tax later is mathematically equivelant. If you think taxes will be higher in the future, you are better off paying them now.
************************************
Next, convert to Roth and pay the 30% or $3,000 tax from other funds that you might have spent on non-productive spending (entertainment, etc.). In 10 years at 10% you have $25,937 Tax Free or $7,781 more than the other scenarios. Even if Obama is still in office when you retire, the gov’t is probably not going to tax Roth’s at 30% (which would get you even with the other scenarios). I bet they will add a Roth Tax in the next 20 years, but more like 5-10%. We’ll see.

[Author]

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