"Mark Freeland" <BnetOnewsX[at]sbcglobal.net> wrote in message
news:y%fUh.3653$2v1.3555[at]newssvr14.news.prodigy.net...

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Yes, I think I agree.

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I do have pre-tax money in my traditional IRA. What's a shame is that I
can't roll over the after-tax portion of the 401(k) directly into a Roth IRA
and the rest into a traditional IRA.

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Index funds, with as few changes as I can manage. As far as I can tell, the
tax-managed funds don't seem to be worthwhile unless you're in the top tax
bracket and maybe not even then.

"Andrew Koenig" <ark[at]acm.org> wrote in message
news:ZVdUh.45104$VU4.27153[at]bgtnsc05-news.ops.worldnet.att.net...
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That's equivalent to asking whether contributing to a non-deductible IRA is
worthwhile (because you are, under these special circumstances, allowed to
take money that would otherwise be in a taxable account, and contribute it,
post-tax, to an IRA).

Same analysis, same results:
a) Yes - it's a way to get more money into a Roth (in 2010, do a Roth
conversion - no income limits and little in conversion taxes IF you don't
have pre-tax money in a traditional IRA)

b) Maybe, otherwise - it depends on how you are going to invest - if you
plan to use a tax-managed fund, and never change investments until you pull
the money out, then a taxable account, taxed at capital gains rates, is
better than an IRA, taxed at ordinary income rates. If you plan to invest
in something that spins off distributions (even as capital gains), then
you'll likely be better off with the IRA. And if you plan to change your
investment every few years, then it is very likely that you'll be better off
with the IRA.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

"Ron Peterson" <ron[at]shell.core.com> wrote in message
news:1176566908.877108.279270[at]y5g2000hsa.googlegroups.com...
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Of course -- but that's not what my original question was about.

Rather, my question was about whether it would be better to roll the
after-tax portion of a 401(k) into the after-tax portion of an IRA or into a
taxable account. Once it's in an IRA, you can't take it out again, but if
it's in a 401(k), you can, under the right circumstances.

On Apr 14, 9:27 am, "Andrew Koenig" <a...[at]acm.org> wrote:

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In my case, I have a tax paid basis (about 20%) in my standard IRA, so
I gain a little from converting. And, since I can pay the conversion
taxes out of regular savings, I can increase the effect amount of tax
free retirement account money.

--
Ron

"Thumper" <jaylsmith[at]comcast.net> wrote in message
news:gq90239bhthnbeh3oj5gfcaf0mner0mck7[at]4ax.com...

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Right -- which shows that having $4,000 in a Roth is not the same as having
$4000 in a traditional IRA. But I never said it was.

Let's compare two scenarios. In each one, you start out with $4,000 to
invest.

1) You put $4,000 into a traditional IRA.

2) You pay 25% taxes on the $4,000, leaving you with $3,000, and you put the
$3,000 into a Roth IRA.

Because the starting point is the same in either of these scnenarios, I
claim that they are of equal worth.

Now, suppose you wait a while, your investment quadruples, and you want to
withdraw it.

In scenario 1, you have $16,000. When you withdraw it, you have to pay 25%
in tax, leaving you with $12,000.

In scenario 2, you have $12,000. You can withdraw it without paying any
additional tax.

So the two scenarios are still of equal worth.


To recap: If you are in the 25% tax rate, then having X dollars in a
traditional IRA is worth as much as having X*(1-25%) in a Roth IRA.

Of course, if tax rates change, it changes the relative worth of the
alternatives. But assuming a constant tax rate of 25%, I can see no reason
to prefer $3000 in a Roth over $4,000 in a traditional IRA or vice versa.

Now, it *is* true that even if tax rates don't change, the fact that the
dollar contribution limits are the same for both kinds of IRA makes a Roth
more desirable, as you can use it to shelter more income. But that issue
isn't part of this discussion.

On Fri, 13 Apr 2007 12:40:48 -0500, "Andrew Koenig" <ark[at]acm.orgwrote:

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You aren't starting on an even playing field with those figures. If
you put $4000 in a pre-tax IRA you get 1000 back come tax time so you
only have $3000 invested but it compounds at the same rate as a $4000
investment in an after tax roth.
Thumper

Don't forget the AMT! I agree Sandra that it is highly unlikely that
the whole "Roth format" will be repealed, but recent trends have shown
that the IRS is using the AMT to do their dirty work. By modifying
what is an allowable deduction under AMT, they can alter the ability
for individuals to take deductions without actually eliminating the
deduction.

Everyone knows to diversify risk: they shout it from the rooftops when
speaking about investments. Why is it that those same people ignore
their mantra when it comes to taxes?

Andrew Koenig wrote:

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<snip
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You could estimate the tax efficiency of your taxable investments to
figure this out. You could do this one of two (or many) ways.

First, you could estimate your future effective tax rate for your
taxable investments. I do this by determining the amount of tax I've
paid over the years on my investments at my marginal rates (with the
addition of estimated taxes due on unrealized capital gains) and
dividing that by my investment gains (including unrealized gains). This
approach is better than just using capital gains rates each year because
it gives credit to some extent for trading strategies that reduce taxes
and also it reflects actual durations that I hold assets. If you just
used capital gains rates, then you would have to make assumptions about
how often you sell assets (you flip everything every year, you hold
everything until the end, or something in between), and how much of your
return is dividends. This approach is time-invariant, but suffers from
not taking into account the amount of earnings that your tax payments
could have earned had they been invested instead of being paid to Uncle
Sugar.

Alternatively, you could estimate the effect of taxes on your returns.
First, estimate the returns on your investments before taxes (I use the
XIRR function in Excel for this - be sure to include flows for selling
your entire account). Then estimate the returns while including the
cash flows from taxes paid (again I use the XIRR function in Excel, but
I include cash flows for taxes this time). Dividing one by the other
will give your tax efficiency over the period. The advantage here is
that you include the time value of tax payments, but the result you're
looking for is no longer time-invariant, you would need to look to see
if there is a break-even point within your investing time horizon where
the taxable account becomes less effective than the taxable IRA.

Of course, these are just estimates, tax rates will change in the
future, favorable capital gains tax treatment may go away, and your
investment style will fluctuate. And of course, you may want to use a
taxable IRA just so that you can roll it into a Roth in 2010. But this
will give you a basis for playing around with the numbers. In my case,
I've decided that taxable IRAs are not for me, I use taxable accounts
instead, given the tax efficiencies that I have so far achieved.

-Will

"Andrew Koenig" <ark[at]acm.org> writes:

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I'm not particularly "confident" about anything the government might
decide to do about taxes. :-P But I think such a retroactive change
to Roth taxation becomes less likely as time goes on and more voters
have more of their wealth tied up in such things. I would guess it's
more likely that Congress would raise tax rates generally. Something
that's also possible is some complete overhaul of the whole tax system;
instituting a flat-rate income tax and/or a national GST and/or
eliminating a whole slew of special-case exceptions and deductions, for
instance. At some point, you just have to recognize that you can't
predict the future, and you need to prepare for anything! ;-)

-Sandra the cynic

"Sandra Loosemore" <sandra[at]frogsonice.com> wrote in message
news:m3slb4t7r5.fsf[at]localhost.localdomain...

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I would be inclined to agree with you if I were confident that the
government won't decide to start taxing Roth IRA distributions in the
future. But I'm not. Are you?

"Andrew Koenig" <ark[at]acm.org> writes:

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It's true that if you do the asset allocation based on the marginal
tax rate you expect to pay when you withdraw the money in retirement,
and you in fact pay that marginal tax rate, you'll end up with the
same amount of money. But, suppose we're talking not $10K to invest,
but looking at the bigger picture of where you'll be when you have
several hundred thousand dollars accumulated for retirement, spread
between 401(k), Roth, and taxable accounts. When you start having to
take required distributions of the pretax money, it might very well
kick you up into a higher tax bracket and cause you to have to pay
more tax on your social security benefits and/or income from taxable
accounts as well. IMO, better to derive as much of your future income
as possible from sources that you don't have to report on your future
tax returns at all. :-)

-Sandra the cynic

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
newsfidnWDy-9emU4LbnZ2dnUVZ_ujinZ2d[at]comcast.com...

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I claim that as long as you're reckoning in after-tax money, it doesn't
matter.

Here's an example. Suppose I'm in the 25% tax bracket, and I have $7,500 in
a Roth IRA and $10,000 in a traditional IRA. Then the traditional IRA is
really worth the same as the Roth IRA, because if I withdraw that $10,000, I
will have to pay 25% taxes on it and will have only $7,500 to spend.

So by my model, both these accounts are worth the same.

Suppose, now, that I can choose which of these accounts I want to triple.
If the traditional IRA triples, it will be worth $30,000. If I pay my 25%
taxes on that, it will cost me $7,500, so I'll have $22,500 when I'm done.
If the Roth IRA triples, it will also be worth $22,500. So it's a wash.

Andrew Koenig wrote:
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So this was her point, if one account were bound to triple, and the
other double, would you not prefer the ROTH do the tripling? I'll "Stick
with the Cynic"(TM) on this one. Might want to take another look at this.
JOE

"Sandra Loosemore" <sandra[at]frogsonice.com> wrote in message
news:m3wt0gtp8u.fsf[at]localhost.localdomain...

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I used to think that too, but I don't any more. Please check my reasoning.

The point is that if you're figuring your asset allocation, you need to look
at the after-tax value of both kinds of accounts. So you need to reduce the
effective value of your traditional IRA by your marginal tax rate.

Once you've done that, it doesn't matter whether assets are in traditional
or roth IRA.

In other words, suppose your marginal tax rate is 25%, and you have $10,000
in a traditional IRA and $10,000 in a Roth IRA. Then your traditional IRA
is really worth only $7,500 because that's what you'll have if you withdraw
the money and pay taxes on it.

joetaxpayer <joetaxpayer[at]nospam.com> writes:

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Note that it may be well worth it, even at the higher fees,
if one expects to leave that employer (how long is the
average length of employment these days?) and roll that
money into an IRA.

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There are indications that as more of the ripoffs are
uncovered, folks are lowering fees. It has happened
very strongly in 529 plans and I believe it's happening
in 401ks, too (though 401ks don't have quite the same
incentive to be competitive that 529s have).

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Sandra Loosemore wrote:

snipped a very excellent analysis
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Choosing between the pre-tax 401(k) (but deposits that are not matched)
I concluded that one needs to look very carefully at the fees within the
401(k). Fees that approach .8% above those in a taxable account will
quickly eliminate the benefit of pre-tax saving within the 401(k).

Posters here have noted their 401(k) fees are comparable to post tax
accounts, yet I keep reading new studies/articles that point toward the
higher fees still being charged.
JOE

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

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Well, let's run some numbers. Let's start out assuming you invest the
money in index funds that grow at 8% for 20 years and throw off no
taxable distributions until you sell them.

Scenario A: $4000 in Roth IRA, plus 28% taxes paid to the IRS up front.
=> $18,644 after taxes

Scenario B: $4000 in pretax IRA or 401(k), and invest the extra 28% in a
taxable account instead of paying it to the IRS.
=> $18,644 before taxes in IRA
=> 5,220 before taxes in taxable account

Who knows what tax rates will be like in 20 years, but plugging in some
numbers that aren't unreasonable now, assume 25% tax bracket and that
capital gains are taxed at 15%.
=> $13,424 after taxes in IRA
=> 4,605 after taxes in taxable account
=> 18,029 after taxes total

OTOH, if you expect to be in the 15% bracket at retirement, the numbers work
out to be:
=> $15,847 after taxes in IRA
=> 4,605 after taxes in taxable account
=> 20,452 after taxes total

Scenario C: $4000 in regular taxable account.
=> $18,644 before taxes
=> $16,447 after taxes

Anyway, my observations based on this are:

* Pretax IRA or 401(k) is a big win over Roth if you expect to be in a
substantially lower tax bracket at retirement.

* OTOH, Roth IRA is a big win over a pretax IRA if you are in a
low tax bracket now. It has only a slight advantage if you expect to be
in about the same tax bracket at retirement.

* Many people can probably benefit from spreading their contributions
between both types of retirement accounts, so that distributions from
the pretax IRA/401(k) are taxed at the lower marginal rate at
withdrawal and additional income taken out of the Roth is tax-free.

* You should max out both your Roth and pretax 401(k) contributions
before investing leftover money in regular taxable accounts. The
numbers above for scenario C assume best-case tax treatment, and it's
still a big lose.

And, a further observation, based on some additional numbers jiggling:

* Most people are going to want to hold a balanced portfolio including
bonds by the time they reach retirement age. You'll end up with more money
if you hold asset classes like bonds with lower returns in your pretax IRA
or 401(k) plan and load up your Roth with higher-returning asset classes,
instead of vice-versa, or using the same asset allocation in both types
of accounts.

-Sandra the nerd

Thumper wrote on [Fri, 13 Apr 2007 03:57:13 -0500]:
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How does that math work?

On Thu, 12 Apr 2007 09:24:42 -0500, "rick++" <rick303[at]hotmail.comwrote:

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Sure because you have already paid the tax on approx $5200 to put
$4000 in the Roth. With a traditional IRA you compound $4000 and only
put $3200 in.
Thumper

rick++ wrote on [Thu, 12 Apr 2007 09:24:42 -0500]:
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Or even less, 25% fed is a common tax bracket. Add in state and local
taxes and it will be under 3K