I’m out again

[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 –

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.

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.[/quote]

Yes, your umbrella comment is correct. This means you are able to convert to cash if you want, without get hit with a tax bill.

The conversion law has no expiration. Even though you cannot contribute to the Roth in 2010 or 2011, you can convert prior year’s contributions in traditional every year going forward. Crazy, huh? No wonder everyone complains about our tax system.

By the way, your initial lump conversion tax might not be as large as you think. I assume you have been making post-tax contributions to traditional IRA’s since your income limit is too high for the Roth. The only portion taxable upon conversion is the gain on the post-tax amount. Your tax returns should have a running tally of the tax basis of your traditional IRA’s on form 8606.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

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.

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.[/quote]

Yes, your umbrella comment is correct. This means you are able to convert to cash if you want, without get hit with a tax bill.

The conversion law has no expiration. Even though you cannot contribute to the Roth in 2010 or 2011, you can convert prior year’s contributions in traditional every year going forward. Crazy, huh? No wonder everyone complains about our tax system.

By the way, your initial lump conversion tax might not be as large as you think. I assume you have been making post-tax contributions to traditional IRA’s since your income limit is too high for the Roth. The only portion taxable upon conversion is the gain on the post-tax amount. Your tax returns should have a running tally of the tax basis of your traditional IRA’s on form 8606.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

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.

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.[/quote]

Yes, your umbrella comment is correct. This means you are able to convert to cash if you want, without get hit with a tax bill.

The conversion law has no expiration. Even though you cannot contribute to the Roth in 2010 or 2011, you can convert prior year’s contributions in traditional every year going forward. Crazy, huh? No wonder everyone complains about our tax system.

By the way, your initial lump conversion tax might not be as large as you think. I assume you have been making post-tax contributions to traditional IRA’s since your income limit is too high for the Roth. The only portion taxable upon conversion is the gain on the post-tax amount. Your tax returns should have a running tally of the tax basis of your traditional IRA’s on form 8606.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

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.

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.[/quote]

Yes, your umbrella comment is correct. This means you are able to convert to cash if you want, without get hit with a tax bill.

The conversion law has no expiration. Even though you cannot contribute to the Roth in 2010 or 2011, you can convert prior year’s contributions in traditional every year going forward. Crazy, huh? No wonder everyone complains about our tax system.

By the way, your initial lump conversion tax might not be as large as you think. I assume you have been making post-tax contributions to traditional IRA’s since your income limit is too high for the Roth. The only portion taxable upon conversion is the gain on the post-tax amount. Your tax returns should have a running tally of the tax basis of your traditional IRA’s on form 8606.

[waiting for bottom]

[quote=PatentGuy]Bottom Waiter –

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.

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.[/quote]

Yes, your umbrella comment is correct. This means you are able to convert to cash if you want, without get hit with a tax bill.

The conversion law has no expiration. Even though you cannot contribute to the Roth in 2010 or 2011, you can convert prior year’s contributions in traditional every year going forward. Crazy, huh? No wonder everyone complains about our tax system.

By the way, your initial lump conversion tax might not be as large as you think. I assume you have been making post-tax contributions to traditional IRA’s since your income limit is too high for the Roth. The only portion taxable upon conversion is the gain on the post-tax amount. Your tax returns should have a running tally of the tax basis of your traditional IRA’s on form 8606.

[sdrealtor]

Well I got out on the 27th as did sdcellar and its looking like we got the top in this go round. Cant say I ever got so lucky before.

[sdrealtor]

Well I got out on the 27th as did sdcellar and its looking like we got the top in this go round. Cant say I ever got so lucky before.

[sdrealtor]

Well I got out on the 27th as did sdcellar and its looking like we got the top in this go round. Cant say I ever got so lucky before.

[sdrealtor]

Well I got out on the 27th as did sdcellar and its looking like we got the top in this go round. Cant say I ever got so lucky before.

[sdrealtor]

Well I got out on the 27th as did sdcellar and its looking like we got the top in this go round. Cant say I ever got so lucky before.

[PatentGuy]

sdrealtor – yes, you did. Ready to go to Vegas with me?

BW – Thanks for the additional insights. However, your observation: “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.)” begs the question. The tax is significant in our case. All of our “convertible” accounts are all funded entirely with before tax $$. The source of the IRA is rollovers of before tax 401ks from previous employers. The money we would use to pay the tax is not something we would otherwise piss away. For now, it is sitting in liquid accounts (e.g., money markets) collecting zip return, and it is money we would invest in something – for example, in equities once sdrealtor gives the green light, or – IF the waited for bottom ever happens, real estate! And, I would be paying these taxes OR investing with after-tax money left after paying a big chunk of tax payment. If my equity investments pay off by following sdrealtor’s lead, the cap gains tax – even under Obama – is a LOT lower than the income tax I have to pay to convert to Roth (under the “punish work, but reward stock market investing” system of our government).

Isn’t there a significant time-value of money loss if we pay tax now instead of paying it 20 years from now? I agree that “if” our tax rate goes up (not much “if” there), it might offset the time-value loss. But, this assumes they won’t end up taxing us on the “tax free” gains they are dangling as incentive for us to pay the tax now, which we both see as likely.

Same answer?

[PatentGuy]

sdrealtor – yes, you did. Ready to go to Vegas with me?

BW – Thanks for the additional insights. However, your observation: “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.)” begs the question. The tax is significant in our case. All of our “convertible” accounts are all funded entirely with before tax $$. The source of the IRA is rollovers of before tax 401ks from previous employers. The money we would use to pay the tax is not something we would otherwise piss away. For now, it is sitting in liquid accounts (e.g., money markets) collecting zip return, and it is money we would invest in something – for example, in equities once sdrealtor gives the green light, or – IF the waited for bottom ever happens, real estate! And, I would be paying these taxes OR investing with after-tax money left after paying a big chunk of tax payment. If my equity investments pay off by following sdrealtor’s lead, the cap gains tax – even under Obama – is a LOT lower than the income tax I have to pay to convert to Roth (under the “punish work, but reward stock market investing” system of our government).

Isn’t there a significant time-value of money loss if we pay tax now instead of paying it 20 years from now? I agree that “if” our tax rate goes up (not much “if” there), it might offset the time-value loss. But, this assumes they won’t end up taxing us on the “tax free” gains they are dangling as incentive for us to pay the tax now, which we both see as likely.

Same answer?

[PatentGuy]

sdrealtor – yes, you did. Ready to go to Vegas with me?

BW – Thanks for the additional insights. However, your observation: “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.)” begs the question. The tax is significant in our case. All of our “convertible” accounts are all funded entirely with before tax $$. The source of the IRA is rollovers of before tax 401ks from previous employers. The money we would use to pay the tax is not something we would otherwise piss away. For now, it is sitting in liquid accounts (e.g., money markets) collecting zip return, and it is money we would invest in something – for example, in equities once sdrealtor gives the green light, or – IF the waited for bottom ever happens, real estate! And, I would be paying these taxes OR investing with after-tax money left after paying a big chunk of tax payment. If my equity investments pay off by following sdrealtor’s lead, the cap gains tax – even under Obama – is a LOT lower than the income tax I have to pay to convert to Roth (under the “punish work, but reward stock market investing” system of our government).

Isn’t there a significant time-value of money loss if we pay tax now instead of paying it 20 years from now? I agree that “if” our tax rate goes up (not much “if” there), it might offset the time-value loss. But, this assumes they won’t end up taxing us on the “tax free” gains they are dangling as incentive for us to pay the tax now, which we both see as likely.

Same answer?

[PatentGuy]

sdrealtor – yes, you did. Ready to go to Vegas with me?

BW – Thanks for the additional insights. However, your observation: “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.)” begs the question. The tax is significant in our case. All of our “convertible” accounts are all funded entirely with before tax $$. The source of the IRA is rollovers of before tax 401ks from previous employers. The money we would use to pay the tax is not something we would otherwise piss away. For now, it is sitting in liquid accounts (e.g., money markets) collecting zip return, and it is money we would invest in something – for example, in equities once sdrealtor gives the green light, or – IF the waited for bottom ever happens, real estate! And, I would be paying these taxes OR investing with after-tax money left after paying a big chunk of tax payment. If my equity investments pay off by following sdrealtor’s lead, the cap gains tax – even under Obama – is a LOT lower than the income tax I have to pay to convert to Roth (under the “punish work, but reward stock market investing” system of our government).

Isn’t there a significant time-value of money loss if we pay tax now instead of paying it 20 years from now? I agree that “if” our tax rate goes up (not much “if” there), it might offset the time-value loss. But, this assumes they won’t end up taxing us on the “tax free” gains they are dangling as incentive for us to pay the tax now, which we both see as likely.

Same answer?

[Author]

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