"John Radgosky" <jradgosky[at]yahoo.com> writes:

- quote -

Well, maybe baby boomers in general are living longer, but it's by no
means certain that I will. :-P Last year I went through a serious
illness and for a while I didn't even know if I was going to make it
this long. I'd go crazy if I spent time worrying about what the
future might bring; about all I can do is plan to keep working as long
as I'm healthy and sock away as much money as I can. I'm not even sure
"retirement", as such, is a particular goal any more, because I found
that having useful work to do during my illness helped keep me sane.

- quote -

One thing I did do right away when I was diagnosed last year was put
together an estate plan and a will. I have no dependents or immediate
family, so it's all going to a charity by default, but it's not like
maximizing the amount left over is a specific goal. OTOH, I have been
trying to simplify and organize my finances so that I don't leave things
in a big mess for my executor to have to straighten out.

-Sandra

Hello Sandra,

All too often we are tempted to jump into action because of some extra
money becoming suddenly available. I urge more caution and to first
invest some time to establish and overall plan for your self and your
future.

Before trying to decide which "tactic" you should employ with the spare
dollars, it's important to first establish what your "goal" or
"objective" is. Then you determine an overall "strategy", and then the
specific "tactic" is easy to decide and seems to just fall in place.

For example, if your goal is retirement income, what you must first
determine is just how much after tax income you want each month to give
you the life style you want for yourself. And you need to include the
impact of taxes and inflation. Then you have to see how much capital
base you can expect from your current tactics so far, and whether there
is a short fall or not.

And you need to plan for a long horizon. We are living longer, and one
of the problems baby boomers will face is how to make their capital
base last long enough.
And you also need to tak into account the risks such as the impact and
likelihood of long term care and health care costs in general in your
plan.

Only after measuring these type of needs, measuring the shortfall, if
any, should you then look for which tactic to employ.

Part of such an exercise would include an evaluation of all your
assets/liabilities to decide a liquidation strategy. And if you have
any goals for "legacy" or "charitable giving" you will benefit from a
basic estate needs analysis as part of a study to determine where you
might invest.

And keep it simple. We use money for only 3 things. We spend, save,
or invest. That's it. And in working out your goals and strategies,
you will then discover whether the spare dollars should be saved, or
invested. The difference being, invested dollars can go up OR down
over time. Saved dollars should not.

And if one of your goals was to be conservative with the spare dollars
then you might end up looking at things like annuities for example.
And I am only saying that to illustrate an example.

I would resist the urge to just suggest what to do with your money. I
would rather set out an overall plan. And I assume you do not have
one, otherwise you would know exactly what to do with the money you are
talking about.

This is probably not the kind of answer you were looking for. It's got
no pezaz or razzle dazzle. And that's why I feel it makes total sense
and more cents over time.

HTH

John Radgosky
Fort Lauderdale, Fl

Mark Freeland <nNeEwTs[at]sonic.net> writes:
- quote -

Except for this, assuming, say, a 20% tax rate:

if you have $10k in a traditional IRA and another $2k in a taxable
acct, when you make the conversion, you'll owe taxes on that
$10k. You can pay those taxes with the $2k you have outside the
IRA. Effectively, you've put another $2k into your IRA.

The Roth lets you invest a greater amount of money in a
tax preferred manner. For a given amount of pre-tax money,
the performance of a Roth is identical to the performance
of a regular IRA. The differences are (a) whether taxes
go up or down; and (b) - the bigger one - the fact that you
can protect a greater amount of money this way.

If you have to pay the taxes from the converted money,
the math makes it identical (assuming same rate of return
and same tax rates). But if you have outside money available,
you come out ahead by effectively converting some of that
outside money into retirement account money.

- quote -

If she's just on the verge of going above the Roth threshold
(she mentioned that next year she probably won't be able to
contribute or convert to a Roth), then presumably her taxable
income is on the order of $90k. In both 2005 and 2006, that
puts her smack dab in the middle of the 28% bracket and
50-60 thousand short of hitting the 33% bracket ($150 or $154k).
That's a lot of room to make conversions.


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Sandra Loosemore <sandra[at]frogsonice.com> writes:

- quote -

If you assume tax rates do not change, and that the rates
of return on your investments are the same along the way,
the end result from a Roth is identical to that of a regular
IRA for a given amount of available (pre-tax) capital.

What a Roth does is allow you to protect more pre-tax
capital. If your tax rate is 20% and you put $10k into
a Roth, it's the same as if you'd put $12.5k into a
traditional IRA.

- quote -

Frankly, I'd max out the 401k *and* make a contribution to
a Roth (if you're eligible). I probably wouldn't worry
about making the conversion right now unless you happen
to be in a particularly low tax bracket this year (ie.
due to being out of a job or something).

- quote -

I wouldn't worry about it. And if your income is on the
upswing, simply max out all of your available tax-preferred
accounts (Roth, 401k, etc).

- quote -

the conversion of the IRA *and* make a Roth contribution
as well. The more of your money you can convert from the
taxable accounts into IRA accounts, the better. It'd help
a little to know what kinds of numbers we're talking about
here, though - if you've got a million bucks tied up in
these accounts, it's a different story than if you've got
$100k tied up in them. At a glance, though, unless you
need all of that 60% easily accessible, use a bit of it
(it'd be no more than 3 or 4%) to pay the taxes on the
conversion of the IRA to a Roth. Then, assuming that
adding another $4k won't take a huge bite out of that 60%,
toss that $4k into the Roth, too.



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Sandra Loosemore wrote:
- quote -

It doesn't make a difference. For example, suppose you have $100 in a
traditional IRA, you are in the 25% tax bracket, and you have $28 in a
taxable account (just enough to cover the taxes on the conversion).

Suppose also that after n years, your investment doubles.

Case 1) You put the $25 into a Roth, and don't convert.
After n years, you have $50 in the Roth, $200 in the traditional IRA.
You closeout the IRAs, and use the $50 from the Roth (tax free) to pay
the now-$56 tax bill on the traditional IRA. That leaves you with $200.

Case 2) You convert the traditional IRA to a Roth, paying the $25 in
taxes. That leaves you with $100 in the Roth. After n years, the money
doubles, and you have $200 available tax free. Same as in case 1.

It comes out the same because either way, what you are doing is moving
the tax money into a Roth IRA (either explicitly, in case 2, or
implicitly, in case 1 by prepaying the taxes).

- quote -

What I have done is convert just enough to keep me in a particular tax
bracket. Using the 28% tax bracket as an example, if married filing
jointly, one could bring one's ordinary income up to $182,800 (using
2005's brackets) without jumping into the 33% tax bracket.
http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
(See schedule Y-1 on the last page.)

Some notes here: We are talking strictly about ordinary income here;
qualified dividends and capital gains don't go into the tax bracket
calculations (they are taxed separately, typically at 15%). But, the
higher your income (whether due to the conversion, or capital gains, or
ordinary income, or whatever), the more likely you are to fall into AMT,
and you have to look at those figures too. (You'll also see phaseouts
of exemptions and deductions, which can raise your effective tax rate a
few percentage points above the nominal 25% or 28%.)

- quote -

That's one theory. Another is that if you prepay taxes (i.e. convert to
or fund a Roth) then you *are* hedging your bets, because you are no
longer subject to the vagaries of tax laws. This assumes that the law
will never be changed to tax Roths. Personally, I consider that a safe
assumption; others are more paranoid.

And speaking of paranoid, I expect tax rates to increase in the future -
too large a deficit, an aging population, etc. So to the extent that
one places bets, I'm personally placing bets this way. (Tax rates are
lower than they've been for decades; I won't complain if I've bet the
wrong way, and rates go lower.)

- quote -

Sounds like you have a good amount that you could afford to move into
sheltered accounts (though of course I don't know how big your whole
portfolio is, and I'm not asking).

- quote -

Don't overdo it. You might tolerate a jump from 25% to 28%, but going
to 33% is a lot of extra taxes. This is where you need to start
guessing about future tax rates.

--
Mark Freeland
nNeEwTs[at]sonic.net

OK, suppose I have some extra money on my hands. My mortgage is paid
off and I'm contributing enough to my 401(k) to get the full employer
match. At this point, people like to recommend that you max out a
Roth IRA before you do anything else.... but would it make more sense
to use the money to pay the taxes on a Roth conversion on an existing
traditional IRA instead? Is doing a Roth conversion such a winning
idea that I should also roll over my 401(k) plans from previous
employers into an IRA and convert them as well, and pull money out of
my existing taxable investment account to pay the taxes? Or is it
better to hedge one's bets about which way tax rates might go in the
future by keeping that part of my money where it is now? Excluding
the home equity and my emergency fund, right now I have about 15% of
my investments in the traditional IRA, 25% in the 401(k) plans, and
60% in my taxable investment account.

If it makes a difference, I'm 46, and this may be the last year my
income is low enough to qualify to do a conversion for a while.

-Sandra