I’m out again

[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?

[waiting for bottom]

Similar answer, same advice.

Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.

In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
*********************************
So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.

To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.

Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.

Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.

This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.

Unless…you believe taxes will be higher in the future.

[waiting for bottom]

Similar answer, same advice.

Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.

In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
*********************************
So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.

To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.

Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.

Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.

This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.

Unless…you believe taxes will be higher in the future.

[waiting for bottom]

Similar answer, same advice.

Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.

In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
*********************************
So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.

To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.

Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.

Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.

This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.

Unless…you believe taxes will be higher in the future.

[waiting for bottom]

Similar answer, same advice.

Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.

In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
*********************************
So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.

To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.

Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.

Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.

This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.

Unless…you believe taxes will be higher in the future.

[waiting for bottom]

Similar answer, same advice.

Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.

In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
*********************************
So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.

To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.

Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.

Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.

This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.

Unless…you believe taxes will be higher in the future.

[PatentGuy]

BW – thanks for the further meth/math. You use 10% annual appreciation and 30% tax rate. More realistic is 4-6% annual appreciation, and 50% tax rate (currently we are at 42%, and it’s not going to get lower).

Regarding opportunity cost, what about the lower tax rate applied to long term capital gains? I believe your examples assumes the “alternative opportunity” gains are taxed at the same rate as our income rate. Right now, long term gains are taxed at half of income. I don’t know what the future holds.

As far as whether the government will say “just kidding” and tax the “tax free” gains in the future (because it can), I suppose they would equally be grabbing whatever gains we obtained from the alternative “opportunity,” so either way …

[PatentGuy]

BW – thanks for the further meth/math. You use 10% annual appreciation and 30% tax rate. More realistic is 4-6% annual appreciation, and 50% tax rate (currently we are at 42%, and it’s not going to get lower).

Regarding opportunity cost, what about the lower tax rate applied to long term capital gains? I believe your examples assumes the “alternative opportunity” gains are taxed at the same rate as our income rate. Right now, long term gains are taxed at half of income. I don’t know what the future holds.

As far as whether the government will say “just kidding” and tax the “tax free” gains in the future (because it can), I suppose they would equally be grabbing whatever gains we obtained from the alternative “opportunity,” so either way …

[PatentGuy]

BW – thanks for the further meth/math. You use 10% annual appreciation and 30% tax rate. More realistic is 4-6% annual appreciation, and 50% tax rate (currently we are at 42%, and it’s not going to get lower).

Regarding opportunity cost, what about the lower tax rate applied to long term capital gains? I believe your examples assumes the “alternative opportunity” gains are taxed at the same rate as our income rate. Right now, long term gains are taxed at half of income. I don’t know what the future holds.

As far as whether the government will say “just kidding” and tax the “tax free” gains in the future (because it can), I suppose they would equally be grabbing whatever gains we obtained from the alternative “opportunity,” so either way …

[PatentGuy]

BW – thanks for the further meth/math. You use 10% annual appreciation and 30% tax rate. More realistic is 4-6% annual appreciation, and 50% tax rate (currently we are at 42%, and it’s not going to get lower).

Regarding opportunity cost, what about the lower tax rate applied to long term capital gains? I believe your examples assumes the “alternative opportunity” gains are taxed at the same rate as our income rate. Right now, long term gains are taxed at half of income. I don’t know what the future holds.

As far as whether the government will say “just kidding” and tax the “tax free” gains in the future (because it can), I suppose they would equally be grabbing whatever gains we obtained from the alternative “opportunity,” so either way …

[PatentGuy]

BW – thanks for the further meth/math. You use 10% annual appreciation and 30% tax rate. More realistic is 4-6% annual appreciation, and 50% tax rate (currently we are at 42%, and it’s not going to get lower).

Regarding opportunity cost, what about the lower tax rate applied to long term capital gains? I believe your examples assumes the “alternative opportunity” gains are taxed at the same rate as our income rate. Right now, long term gains are taxed at half of income. I don’t know what the future holds.

As far as whether the government will say “just kidding” and tax the “tax free” gains in the future (because it can), I suppose they would equally be grabbing whatever gains we obtained from the alternative “opportunity,” so either way …

[waiting for bottom]

Let me be clear on one thing:

No matter what assumptions you use, if you think taxes will be higher when you pull out the money than they are when you put the money in, the Roth will win every single time.

[waiting for bottom]

Let me be clear on one thing:

No matter what assumptions you use, if you think taxes will be higher when you pull out the money than they are when you put the money in, the Roth will win every single time.

[waiting for bottom]

Let me be clear on one thing:

No matter what assumptions you use, if you think taxes will be higher when you pull out the money than they are when you put the money in, the Roth will win every single time.

[waiting for bottom]

Let me be clear on one thing:

No matter what assumptions you use, if you think taxes will be higher when you pull out the money than they are when you put the money in, the Roth will win every single time.

[Author]

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