Will Trice wrote:
- quote -

AFAIK, it's just a regular 401k, not Roth 401k but I surmise from all the replies I
won't submit anything after-tax

On Fri, 6 Apr 2007 09:03:27 -0500, Sandra Loosemore
<sandra[at]frogsonice.com> wrote:

- quote -


My mistake then. I thought the poster had not maxed out his 401k and
only put in up to the matching amount.
Thumper

Thumper wrote:
- quote -

In many of these threads, there's an 'if/then'. Few OPs post their
entire balance sheets for review and comment. Sandra offered a valid
if/then, and I, a point of clarification.

You wrote "Generally it helps wealthy people more." I've posted two
examples where it helps to keep a retired 80 year old in the 15%
bracket, avoiding having her RMDs put her over 25%. If she's over by say
$4000, well, there's $400 my strategy just saved her. And a non-working
48 year old already drawing on her savings. She converts just enough to
stay in the zero bracket (i.e. her 'taxable' income is zero after std
deduction and exemption). Since there are caps to Roth deposits and
conversions based on income, anyone with real wealth cannot take
advantage of Roth IRAs, not until 2010, anyway.
JOE

Jim wrote:


- quote -

Probably a stupid question, but... Is the after-tax contribution you're
allowed actually a Roth 401(k) contribution? In that case, this could
be a good idea. If not, then I agree with Sandra that it probably is
not a good idea to contribute to your 401(k) after tax.

-Will

Thumper <jaylsmith[at]comcast.net> writes:

- quote -

If you go back to the top of this thread, I mentioned doing a Roth
conversion as just one possible thing to do with extra money when one
has already maxed out regular IRA and 401(k) contributions. The OP
asked for more details, and I supplied them; I'm not trying to
"advise" him to do it. *shrug*

-Sandra the cynic

On Thu, 5 Apr 2007 18:58:09 -0500, Sandra Loosemore
<sandra[at]frogsonice.com> wrote:

- quote -

You aren't telling the whole story. Assuming a 28% tax rate, you are
investing 28% more than the Roth and it compounds at a higher rate.
If your tax rate drops to 15% in retirement you must keep a Roth for
12 years after conversion WITHOUT WITHDRAWALS to break even. Of
course if your bracket remains the same the period is much shorter.

- quote -

convert or take it out of your IRA. There are many other
considerations.

This is a good article on conversion.
http://www.fool.com/investing/small-...derations.aspx

and another.
http://www.businessweek.com/1998/05/b3563140.htm

All I'm saying is that converting is not for everyone and is highly
personal. Generally it helps wealthy people more.
THumper
- quote -

On Thu, 5 Apr 2007 19:52:44 -0500, joetaxpayer
<joetaxpayer[at]nospam.com> wrote:

- quote -


I know that. What I'm getting at is that people are advising the
poster without regard to his individual circumstances it seems.
Thumper

Thumper wrote:

- quote -

In addition to what Sandra (who appears more the realist than cynic to
me) wrote, the Roth can be used as a method of managing one's tax
burden, watch your bracket carefully (see
http://www.fairmark.com/refrence/index.htm for this) and you can make
Roth conversions to stay in your bracket but not go over it. If you have
post tax savings as well as pretax, you can manage your IRA withdrawals
to avoid a phantom 50% tax bracket, which occurs as social security
benefits get taxed. By having much of your money converted prior to
retirement, this trap is avoided.
JOE

Thumper <jaylsmith[at]comcast.net> writes:

- quote -

It's a way to tax-shelter some extra money. $20K in a traditional IRA
isn't worth as much as $20K in a Roth IRA, because 28% (or whatever
your tax bracket is) of the money in the traditional IRA really
belongs to the IRS instead of to you. OTOH, all of the money in a
Roth IRA belongs to you. By converting a $20K traditional IRA to a
$20K Roth IRA by paying the taxes out of some other non-tax-sheltered
cash account, you've effectively added the amount of the taxes to your
tax-sheltered investment.

Roth IRAs are also more flexible than traditional IRAs with respect to
withdrawals. And some people might want to do a Roth conversion if
they believe their tax rates will be higher after retirement than they
are now.... maybe because they figure they'll have higher income in
retirement or because tax rates now are historically low and are more
likely to go up again than down.

-Sandra the cynic

On Thu, 5 Apr 2007 14:41:06 -0500, Sandra Loosemore
<sandra[at]frogsonice.com> wrote:

- quote -


What's his benefit to do a Roth conversion?
Thumper


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

"Jim" <Jim[at]decombabulator.com> writes:

- quote -

If you took the IRA deduction, then the money is "pre-tax", and you
need to pay taxes on the full amount if you do a Roth conversion.

- quote -

Yes.

- quote -

If you decide to do a Roth conversion, I suggest setting aside the
cash for taxes right away when you send in the conversion paperwork to
your IRA custodian, even if you don't need to send the money to the
IRS right away. It's possible to un-do ("recharacterize") a Roth
conversion before the end of the year, if you change your mind or
discover you don't have the enough leftover money to pay taxes after
all, but it's extra hassle.

-Sandra the cynic

Sandra Loosemore wrote:
- quote -

hmm... not pre-tax but I (this goes back 15-20 years) paid from my checking
account 4k during two years into a traditional IRA and reported it on my tax
return that year and took the deduction as instructed

does that make it clearer? IOW, I paid with after-tax dollars but took IRS
instructed tax deduction that year.

probably still owe about 5.6k

now, since I routinely get back 3k per year, it wouldn't be such a big deal
as I would just owe 2.6k new tax filing time

"Jim" <Jim[at]decombabulator.com> writes:

- quote -

The $8K was all pre-tax money? Then if you do a Roth conversion, you
owe taxes on the whole $20K. If you're in the 28% bracket, say,
you'll owe (0.28 * 20000) = $5600 to the IRS. Plus whatever state
taxes are due, too.

If you made non-deductible contributions to your IRA, you should have
saved the form 8606 you filed with your taxes in the years you made
the contributions. These show your total "basis" in the IRA, and you
can subtract that from the amount you have to report as taxable
income. For instance, if your $8K was all non-deductible
contributions, then you'll only owe (0.28 * (20000 - 8000)) = $3360 in
taxes.

-Sandra

joetaxpayer wrote:
- quote -

appreciate all the comments, in my case I have just the 20k so maybe my
situation is a bit simpler

is there an easy back-of-the-enveloper estimator/calculator where I could
try to estimate what the tax bill might be on a sum of just 20k? in my case,
this represents just 2 years of 4k (total 8k) of salary so my gain is 12k
and original tax deducted money is 8k

"Jim" <jim[at]decombabulator.com> writes:

- quote -

Yes. The only restriction is that your AGI (excluding the Roth money
you're converting) has to be under $100K in the year you do the
conversion. The limit is going to go away in another year or two,
though, so even if you have too much income to do that now, you'll be
able to do it in another couple of years.

- quote -

More or less. Depending on your situation, you may or may not need to
pay estimated taxes to avoid getting hit with a penalty for
insufficient withholding when you file your 2007 return. One way you
can avoid that is to increase your withholding instead. IIRC, if your
withholding is sufficient to fully cover *last* year's taxes, that's
sufficient to avoid penalties, and you can just pay the balance when
you file your return.

- quote -

It's possible, but dumb. :-P A Roth conversion only makes sense if
you have cash outside the IRA account to pay the taxes. If you have
to withdraw money from the IRA account itself to do so, you're not
only throwing away the main benefit of doing the conversion
(tax-sheltering more of your savings), but you'll have to pay an early
withdrawal penalty on the part of the IRA money that goes to paying
taxes, too.

-Sandra the cynic

Jim wrote:

- quote -

Any conversion now goes on 2007 return next April.

- quote -

Jim - there are multiple issues at play here. If you are not maxing out
your 401(k) and Roth, (15500+4000 for under 50) this wont apply (well,
it could, but first things first).

If you are maxed out, and find you have extra cash, it may make sense to
take IRA money, and convert to Roth. You pay the tax on money that was
pretax deposited, as well as all gains. (read that - the only non taxed
money is if you made any post tax deposits). The Roth, then won't be
taxed again. You should not use the IRA money to fund the tax payments.
Only consider the conversion if you have side money to pay, otherwise
the money taken out is penalized as well.

A Roth conversion is a great idea, more so if you have situations where
your tax bracket changes and you convert while in a lower bracket. But
as fellow poster Elizabeth points out, there are other benefits where
long term, it makes sense regardless of bracket changes. I still
maintain a caution that if you happen to have a lot of money, say $100K
to convert, a bit of planning and converting over two or three years may
be more beneficial than the all at once.
JOE

Sandra Loosemore wrote:
- quote -

this I've read somewhere but did not understand fully.

so what you're saying is that I can take my 20k in a traditional IRA and having
already contributed after-tax 2006 & 2007 Roth IRA maximums, I can still roll over the
20k from IRA --> Roth IRA and just pay with cash the taxes now ?

assuming (for an example) that I did this in May 2007, I would pay taxes this year and
report these payments on my 2007 tax return when I file in 2008 ? did I understand the
steps correctly ?

Is it possible to pay the taxes for the IRA to Roth IRA with parts of the 20k or will
I pay taxes with different funds? (ie. cash)

"Jim" <Jim[at]decombabulator.com> writes:

- quote -

Stay away from making after-tax contributions to a 401(k) plan. It's
a bad idea from a tax standpoint, and it'll complicate your
record-keeping for years to come.

If you want to hedge against tax rates going up in the future, a better
strategy is to contribute enough to your 401(k) plan to get the full company
match, and then make after-tax contributions to a Roth IRA instead. The
Roth gives you more options about how to invest and when to withdraw the
money, and saves you the headaches of keeping track of both before- and
after-tax contributions in the same account.

If you still have money left after that, go back and max out the
before-tax contribution to your 401(k) plan.

If you still have money to save after *that* (lucky you!), you're best
off just dumping that money into a regular brokerage account. Index
funds and muni bonds are tax-friendly investments to hold in such an
account because they don't generate much taxable income or capital
gains. Alternatively, some other good things you can do with your money
are:

* Do you have any debt? Credit cards and car loans should be paid off
as quickly as possible. Student loans and mortgages next.

* Do you have an emergency fund? Having 3-6 months living expenses tucked
away in a bank or money market account gives you a cushion against having
to go into debt if you should lose your job or have some other emergency.

* If you don't already own a home, do you want to buy one?

* Do you have any old traditional (before-tax) IRAs sitting around, or
401(k) money sitting around in an old employer's plan? Doing a Roth IRA
conversion on those moneys and using your extra cash to pay the taxes due
on the conversion is the same as putting that extra cash directly in the
Roth, and a way to bypass the limit on regular Roth contributions.

-Sandra the cynic

Jim wrote:

- quote -

In 2007, $15500 for under 50, and $20500 for 50 and older.
Dare I say it? The chart for this and IRA numbers is at
http://www.fairmark.com/refrence/index.htm

JOE

PeterL wrote:
- quote -

what's the age limit? something like up to 20k/year if you're 50 or over?