Talk about picking up an old thread! Okay, here's the link to the thread,
for context:
http://groups.google.com/group/misc....7e9b6a7626f674

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1165973274.232554.209380[at]j44g2000cwa.googlegroups.com...
- quote -

I believe I meant Roth 401(k) as well as two Roth IRAs. My stated reason
was that maxing out a Roth shelters more than maxing out a deductible,
traditional plan (whether we're talking about a 401(k) or an IRA).
Further, as you suggest below, having investments in a plan with RMDs can
force higher taxes later.

- quote -

Mark Freeland
BnetOnewsX[at]sbcglobal.net

- quote -

portion and NOT the 401k portion, correct?

No where here did you make any assumptions for prior assetts invested.
This is the sticky part for me... if I have what would be projected to
around $2,000,000 in a traditional 401k at age 68 (say $1,000,000 at
age 58), and assuming income won't decrease anytime soon to "convert",
is their logic to suggest NOT having this much in a tax deductable
account.

I see the advantages "going in"... I am more concerned with withdraw
rules and timing on way out. I think this situation suggests using the
Roth 401k sooner (even if MAGI is much less than 150k).

Projecting RMD's appears quite speculative to me-
have to assume tax brackets, have to assume life expectancy factors,
have to assume rate of returns. But we know RMD's will exist, and the
goal should be keep RMD's the same tax bracket as while contributing
(this tax bracket establishes standard of living/ basic costs during
retirement).

The goal would be an amount in the traditional 401k/ tax deductable IRA
to equal an income in current tax bracket
then have rest of monies in Roth type accounts.

note to moderator, please post second response only... if possible.
Trimmed more and corrected a misspelling- wish google had a spell check.

joetaxpayer wrote:
- quote -


Jim,
Tax tables are ALWAYS phrased in terms of taxable income, after
exemptions/deductions, and yes all of these are indexed upwards each
year. Though as you probably know the brackets themselves change quite a
bit every now & then, with major tax legislation.

And not to complicate it too much but you don't use those tax tables if
part of your income is from long-term capital gains or qualified
dividend income. When you have this type of income you run through a
different form on your federal return to calculate your tax.

Social Security becomes taxable if your income goes over a certain
limit. See:
http://www.irs.gov/newsroom/article/...107537,00.html
http://www.irs.gov/publications/p915/index.html

Getting back to the point -- you're trying to guesstimate future
distributions, taxes, etc. It's very hard to try to factor in these
different variables - deductions, Social security taxation, capital
gains, etc. To estimate what things would look like based on today's tax
code, you can either buy a $600 piece of tax-planning software or just
use a copy of TurboTax and type in your hypotheticals. Pretend you're
the retiree filling out the tax return- add in Social Security income,
see how it's taxed when you add in different IRA distributions, etc. As
good a guess as any, for about $580 less than the professional method!

Also - don't forget about state taxes which are all over the map. Many
don't have a special capital-gains rate, some don't tax part of your
IRA/pension income, etc etc. Again, tax-prep software can handle that.

-Tad

jIM wrote:
- quote -

As the poster who frequently references Fairmark's site, I'll jump to
answer this.
1) The tax chart is based on the final 'taxable income' number.
2) Some SS can ripple through to become taxable depending on other
factors within the return.
3) With few exceptions, the Roth IRA withdrawal is tax free. So for this
exercise, NO.
4) Of course.
5) Well, the taxable income number is the final number, so it was
subject to all the schedules, A thru Z, A for itemized, D for stock
transactions, etc.

Fairmark shows the history for some key numbers including STD deduction
and Exemptions, 2004-2006, Exemptions went up $100/yr. STD went up
$150/yr, so $250 total, and Tad is right, bracket crept up a bit as
well. My experience with an 80 year old http://www.joetaxpayer.com/roth.html
takes this into account. The fact that RMD at 80 is 5.35%, but at 85
jumps to 6.75 (and I'd say the absolute number is higher due to account
growth, so an RMD at 80 of $5,000 can be $8-10,000 at 85.) Using Roth to
top off the bracket can help avoid this, and of course each year the
current tax situation is taken into account. This is why some of my
clients have an earlier conversation, mid-November, to plan. Other's
numbers will be different, but the concept is the same.
JOE

Tad Borek wrote:
- quote -

I have limited knowledge of accounting theory... a few questions-

question on the tax tables (such as the ones at
http://www.fairmark.com/refrence/index.htm
).

1) Are the numbers listed "gross income", "AGI", or something else.
2) would income from SS be included as income?
3) would income from Roth IRA be included as income?
4) would RMD's from traditional IRA/401k's be considered income
5) are their things exempt from this calculation I have not asked
about?

There is a "standard deduction" which Tad included in his post above...
I know this is set for married couples, and is different for single
people and is different for dependants (like children). I assume the
tax tables above are before this standard deduction is applied?

As Tad suggested, the tax brackets grow somewhere between 3-4% each
year. Does the standard deduction change much?

I am asking so I know what to factor into calculation being discussed.

Thank You.

Tad Borek wrote:
- quote -

I understand that making decisions like this involves assumptions, and
I know the assumptions above have assumptions which amplify other
assumptions. Changing tax rates, rates of return prior to retirement,
which tax bracket applies.

One not mentioned was that life expectancy should increase, so the RMD
for a given principal will "decrease" over time. Unless there is
something which goes into calculating/ estimating RMDs which I am not
aware of.

I did like the idea of normalizing the RMD using an inflation factor,
thank you.

jIM wrote:
- quote -


Jim, even if tax brackets remain the same it's going to be much better
than that!

First, don't forget that even if the tax-bracket scheme stays exactly
the same as it is right now, the dollar values of each bracket are
indexed upwards every year. So today's $61,300 bracket will rise beyond
$65k, $75k, (100k...), etc as the years go on. As an example the 25%
bracket which starts at $61,300 in 2006 will be $63,700 in 2007, nearly
a 4% increase.

The other thing to factor in is that brackets are based on taxable
income, not AGI, so the tax will be lower than if based just on that MRD
figure. As a baseline you might use today's standard deduction and
exemption. A retiree paying medical expenses (including insurance
costs), especially one with high property taxes, could be itemizing
their deductions so the taxable income may be even lower.

How to estimate the impact? Perhaps an approach would be normalize it.
Discount back a $1.7M IRA/401k in 20XX at some inflation rate - say, 3%
- to see what it represents in 2006 dollars. Then see what the MRDs
would be today on THAT value, and take out the standard deduction & your
exemptions to arrive at taxable income. It's just a WAG but it's at
least a starting point that acknowledges the effect of inflation on tax
brackets. For all that data on deductions, exemptions, brackets here's a
great one-stop source:
http://www.fairmark.com/refrence/index.htm

-Tad

- quote -

Current tax rates are one issue going into this. Projected RMD's and
the tax bracket they are in would be another. I focus most of my
attention on the RMD's and withdraw rules.

For example, the 85k I have in my tax deductable 401k is probably worth
around $1,700,000 at age 70. The RMD for this is just above the
$61,300 tax bracket... (RMD is $62,000)meaning I could continue using
the tax deductable 401k for a little while.

If I have $450,000 in same 401k at age 45, that would be ~$3,350,000 at
age 70. The RMD on this is ~$122,000, which is the next highest tax
bracket.

so this implies to me, somewhere between $85k at age 33 and $450k at
age 45 in 401k is when it's appropriate to convert even if income is
not at threshold mentioned. This is where taxes in retirement exceed
current tax bracket.

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
newsDZfh.8068$Ga1.4807[at]newssvr12.news.prodigy.net...
- quote -

Thanks for the correction. My calculations (but not conclusion :-) were
wrong. For clarification, the traditional IRA nets more at time of
investment, ignoring future tax liabilities, i.e.
$4000 (trad IRA) + $1K (taxable) vs. $4K (post-tax Roth IRA).

- quote -

Even without the drag, the traditional IRA will still net less. Suppose
everything doubles in value (makes the arithmetic simple):

$8K Roth - worth $8K after withdrawal.

$8K Traditional + $2K taxable
owes taxes of $2K on the IRA, and $300 on the taxable investment (assuming
the lower 15% tax rate on a LTG); this nets to $7,700.

As you said, if the taxable account is bled, the return is even worse.

- quote -

Agreed. All analyses (both mine and Bread's) came with the significant
qualification: "all else being equal".

- quote -

It's not just the MRDs. If the traditional IRA is inherited, then it will
be subject to taxes at the rate of the beneficiary. (This is where a Roth
conversion comes in handy - but in retirement, where the tax bracket has
dropped.)

- quote -

There are different approaches one can take.

- Maximize the value in the worst case (where one retires in a zero
bracket). That leads one to use exclusively deductible vehicles (trad DC
plans, deductible IRAs) to the extent possible (unless one is in or near a
zero bracket now).

- Or one can try to maximize expected value in retirement (even to the
detriment of the worst case). I agree that it depends on one's situation,
though I suspect that most (not all) situations will find expected value
improved by using Roth vehicles to the extent possible.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Mark Freeland wrote:
- quote -

Mark, I followed that link & some comments on the comparison...if you
have $4,000 available for a Roth and you're a 25% marginal taxpayer,
that means you had $5,333 in pretax income available (of which $1333
went to taxes, with $4k left for the Roth). So the Trad-IRA alternative
needs to start with $5333 as well. If you direct $4k of that to a
Trad-IRA you'd have $1333, minus taxes, or another $1k, left to invest
in a taxable account, not $750. That makes the Trad-IRA net a little higher.

On the flip side your taxable account with that $1k alongside the IRA is
going to have some taxes year to year, so the return will be under the
assumed 8% enjoyed by the Roth. It could introduce tax drag of as much
as 1-2% per year.

But realistically it all gets down to the exit tax rates. Generally I
don't think it's accurate to say that the Roth is necessarily superior
to a traditional 401k/IRA, the comparison hinges entirely on tax
assumptions. I agree that future rates may be much higher, but plenty of
people are headed to a zero- or low-tax retirement. I actually just
reviewed this for a retiree, where even a 10%-12% tax on Roth conversion
doesn't make sense because there appears to be no likelihood of income
tax in the future, on the MRDs from a Trad-IRA. The 05 and 06 federal
tax rates have been 0% despite the income from the tax-deferred account.
Of course not everyone is in this situation.

-Tad

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1165954722.092110.221510[at]80g2000cwy.googlegroups.com...
- quote -

Here's my calculus for your situation (married, under age 50):

- If MAGI, assuming no salary reduction for contributions to Roth 401(k), is
under $150K, then contribute pure Roth: $15K 401(k) + $4K (IRA) + $4K
(spousal IRA).

This is because contributing $15K to a Roth is superior to contributing $15K
to a traditional 401(k). See my posts in another thread showing same thing
for traditional vs. Roth IRA if maxing out:
news:kZ5ch.189$qO4.90[at]newssvr13.news.prodigy.net or
http://groups.google.com/group/misc....e4e24ceaa01039

- If you MAGI is over $175K, then go with the Roth IRA. No amount of
salary reduction into a 401(k) will bring you under $160K, and $15K in the
Roth 401(k) is superior to $15K in a traditional 401(k).

- If you MAGI is between $150K and $160K, contribute to the traditional
401(k) only enough to bring your MAGI down to $150K.

For each $2K you contribute, you reduce your MAGI by $2K, you can contribute
20% ($2K/$10K) * $4K more to a Roth IRA per person. So by moving $2K from
Roth 401(k) to a traditional 401(k), you pick up $800 (your Roth IRA) + $800
(spouse Roth IRA).

The tradeoff - give up $2K in Roth 401(k) for: $1.6K in Roth IRA + $2K in
traditional 401(k) is a win.

- If your MAGI is over $160K, the calculations get more complicated. I'll
leave that to another post.

Implicit in all of this is my belief that sheltering more outweighs
subsequent unknown changes to the tax code, including unknown future tax
brackets. High MRD can be dealt with by gradually converting IRAs to Roths
once income drops.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Mark Freeland wrote:
- quote -

If one sees the day coming where that person is not eligible for a Roth
IRA, should they use the Roth 401k immediately? Meaning a person sees
the day they cannot make Roth IRA contributions coming soon, within 2-3
years... so creating a Roth 401k- should it be done well in advance of
losing Roth IRA eligibility, or should one take the "tax break" of a
traditional 401k as long as possible?

This was the first year I had the choice of a Roth 401k. I elected not
to use it... but I see the need for my Roth accounts to grow in value
relative to tax deductable accounts.

For example:
85k in 401k (traditional 401k)
40k in Roth IRA

Ages 34/33, Income growth is looking to reach 160k of gross salary in
~4-8 years. Current Gross Income is 110k. 70k\40k among spouses...
40k is increasing around 10% per year, at minimum. 40k does not
include bonuses.

As I see the situation, the 85k right now is not a large enough amount
to think that RMD's will put us in a higher tax bracket than we are
now. But if the 401k had more in it now, it would make me think I
needed to start the Roth 401k sooner.

Is their better logic to use when to start a Roth 401k? Thoughts
welcome.


======================================= MODERATOR'S COMMENT:
Thanks for trimming the previous post.

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1165853837.049991.110860[at]f1g2000cwa.googlegroups.com...
- quote -

I'm looking at the same thing for 2007 - this gets tricky, because a Roth
401(k) contribution cannot be recharacterized as a traditional 401(k)
contribution. So, if you are working for a company, you are stuck with your
decision (Roth vs. traditional) as contributions are deducted from pay. If
you are self-employed (individual 401(k)) then you can hold off until the
end of the year to contribute, but you lose the tax-sheltering for a year.
http://www.fairmark.com/rothira/roth...ompare-ira.htm

I agree with you about not using a non-deductible IRA - the breakeven point
(because distributions are taxed as ordinary income) may be decades out.
The only time (under current tax laws) that IMHO it makes sense to make
non-deductible contributions is if one has very little in a traditional
IRA - then in 2010 one can convert the non-deductible contributions (and
their earnings) and only pay taxes on the earnings.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

- quote -

As rates were falling a few years back, I ran into countless people who,
when told that for no money out of pocket (and no addition to principal)
they could refi to a lower rate. In a couple cases the monthly savings
was 'only' $250, in another, I suggested pulling in the time from the
remaining 18 years to 15 to capture the (even lower) rate a basically
keep the same payment.

The pushback I got was amazing. As though producing the standard pack of
data was like going under the knife for surgery. Curious if that's the
general view. Could the average person be that adverse to digging up the
documents required?

JOE

woessner[at]gmail.com wrote:
- quote -

Have you asked her employer if this change will open up any deferred
compensation options?

woessner[at]gmail.com wrote:
- quote -

I've done multiple recharacterizations (during the 2000 - 2002 bear
market) and I've also removed contributions from a Roth (Tad mentioned
this in his post). I did not find the paperwork for either difficult at
all, but others here have disagreed and believe that the paperwork is a
significant deterrent for executing this strategy. But what the heck,
what's a little paperwork?

-Will

Mark Bole wrote:
- quote -

True. And that's a good last-resort (especially if I get to convert it
to a Roth in 2010). However, my preference would be to just make a
Roth contribution now. Suppose I make a traditional contribution and
later discover that I was eligible for a Roth contribution. Is there a
way to go back and 'undo' the traditional contribution (other than the
regular Roth conversion - we're definitely not eligible for that).


jIM wrote:
- quote -

I've heard of this, and I think it's a good approach. My only concern
is the re-characterization process. Has anyone actually done it? I
know absolutely nothing about it, but I just have the gut feeling that
it's kind of painful (in terms of paperwork).

Todd H. wrote:
- quote -

I favor the Roth for two main reasons. First, our taxes are already
ridiculously low. I estimate that we'll pay about 6% in federal income
tax this year. Next year will be a transition year, with my wife's
salary going up mid-year. After that, we'll have to re-evaluate Roth
vs. traditional. If our taxes go way up, it may be time to switch.

The second reason I favor the Roth is that we're only 28. It seems to
me that, as the money sits and compounds, the Roth becomes a better and
better deal. Since we're a long ways from retirement, the Roth seems
to be a clear winner.

--Bill

woessner[at]gmail.com wrote:
- quote -


The Roth example is a common problem due to the income limits for a Roth
-- if you're close to the limit, you might not know until year-end
whether you qualify. There are two ways of addressing it without
delaying your contribution until after the end of the year. One is to
make the contribution and then "recharacterize" it later, if necessary.
This means "transfer the money from a Roth IRA to a Traditional IRA."
Doing so turns it into a traditional IRA contribution, which may end up
being nondeductible, but at least would be allowed. The other
alternative is to simply take the contribution out of the Roth IRA.

The deadline for either of these alternatives is the due date of your
tax return. With both you need to take out both the contribution and any
earnings attributed to it. The IRS guidance discusses these things in
detail - see Publication 590 at
http://www.irs.gov/publications/p590/index.html

A downside of writing the check April 15 2008 is that you lose the
benefit of tax-free growth between January 2007 and then, and future
tax-free compounding of THAT growth. Of course, if the market dips you'd
be better off -- it could work either way.

Last point - it's important to put the year of contribution on your
checks, the custodian tracks and reports this to the IRS. You can make
an IRA contribution any time during the calendar year, plus the next
year until April 15 (or whatever the April filing deadline is). So in
that few-month window through April you can make both current- and
prior-year contributions. It's especially important to note the year of
contribution then because custodians will consider it "current year"
unless indicated otherwise.

-Tad

Todd H. wrote:
- quote -

qualified Roth withdraws are tax free
deductable IRA and 401k withdraws are taxed at ordinary income rates.

If (WHEN) our combined AGI exceeds the limits for a Roth IRA (AGI of
$160,000, I believe), This would imply to me that we have a significant
amount saved (we contribute 10% to 401ks now) and would likely be in
higher tax bracket when we retire as well... so using the Roth to pay
taxes now gives us the flexibility to

1) avoid large RMD's from 401k/ traditional IRA assetts
2) avoid paying taxes on some of our income in retirement

"woessner[at]gmail.com" <woessner[at]gmail.com> writes:

- quote -

Personally I may my 401k out before making any roth IRA
contributions.

The reason, unless I'm wrong is that 401k contributions reduce your
taxable income (i.e. you're investing with tax-free bucks), while roth
ira contributions do not.

I admittedly don't know all the in's and outs of this, but perhaps
other posters will illuminate further with more precise language. df

--
--
Todd H.
http://www.toddh.net/