Are you converting your non-Roth IRAs/former job rollover IRAS to ROTHS?

[sste]

So, as of 2010 we can all convert our non-roth iras and rollover-iras to roths. So, you pay taxes on the account value at your income tax rate but then at retirement you can withdraw tax-free. I have been calling about this and it seems like a good idea but I think my tax liability is going to be at at least 60k, probably more (I can spread it over 2 years). I haven't even had the heart to look at DH's yet . . . I am still in sticker shock.

Anyone thinking about or planning to convert?

[LMPC]

Yeah, I'm definitely converting my traditional to a Roth. My tax liability won't be that much because I haven't made that much money on my investments vs the amount I have put in (one upshot to the economy). Surely there is a way for you to calculate the difference between your tax liability now and your taxes (predicted) when you retire. Hope that makes sense....might give you a better idea if it's worth your while or not.

[LMPC]

Sorry, one more thing....OP, you said "as of 2010" but I think it's *only* this year that we can do this roll over and not pay taxes when we withdraw the money. Is that how you understand it as well?

[sste]

This is what I got from my conversations with fidelity/vanguard/my school retirement,,you all can tell me if it sounds right to you:

1. You have to pay taxes not just on the gain but on the entire amount in the account if the money came from a deductible IRA or from a rollover from a 401k (so you got the tax benefit at the time you put the money in which is why you need to pay on the whole amount now). If its a nondeductible IRA, then I *think* you just pay on the gain. Unfortunately for me, most of my money is rollover.

2. The provision is for 2010 but if you want to gamble, which I probably don't, the guess is that it will be extended beyond that for a variety of reasons, including the government needing money now!

[LMPC]

Yes, that sounds right to me...I forgot about my contributions being nondeductible when I put them in.....that's why I'll pay on just the gains for my IRA. Thanks for the clarification!

[egoldber]

So what is the advantage to doing this? I don't see it? Is it just to take the tax hit hit now vs later?

[sste]

Well, I think there is some business about it depends on your tax bracket now versus later and years to retirement.

But, as someone with retirement a long way off, the main thing is that I can either pay taxes on the amount I have in now . . . or when I retire pay taxes on the MUCH larger amount, compounded over 30 years.

Presumably, putting the money I would be paying now to convert into an index fund and leaving it there for thirty plus years would have similar effects financially to having the tax free accumulated ira income . . . but I am unlikely to do that. And its nice the government is letting taxpayers space over 2 years.

[smiles33]

We opened Roth IRAs this year so we could roll over IRAs into them just because of this new tax law. Normally, we don't qualify to contribute due to income limits. The prospect of tax-free growth over the next few decades is too good to pass up. Plus, I think our advisor said you can pass the Roth IRA down to your kids, so it might be even more decades of tax-free growth!

[wellyes]

Our IRAs have always been Roths.
Our rollover would be very expensive to convert.
Not precisely sure who benefits from this new rule.

[sste]

The prospect of tax-free growth over the next few decades is too good to pass up. Plus, I think our advisor said you can pass the Roth IRA down to your kids, so it might be even more decades of tax-free growth!


I hope so! This is pretty much going to wipe out my buying a new car in the next two years and starting our vacation house fund. It is going to be some financial pain for the next two years if my tax liability estimation is correct.

[egoldber]

Yowza I tried to read about this and my head is spinning. I hate investment stuff. :o Are there income limitations? It really was just not at all clear to me.

[sste]

No I don't think there are any income limitations. The 2010 provision removed any income limitations as I understand it. DH and I haven't qualified for roth iras for years so now we have built up quite a bit in deductible and nondeductible iras and also those freaking rollovers IRAs!

[egoldber]

Yes, we have several rollovers from various jobs over the years for both of us and it's a huge PITA. Dealing with all the different forms at tax time is a pain.

But I have to admit the idea of taking on the tax burden for that right now is not sounding so fun.

[LMPC]

I'll second the fact that there are no income limitations. I, too, have not qualified for a Roth in quite a few years. I think the lack of income limitations is what makes this such a novel thing...

[egoldber]

Some caveats that I found when Googling:

http://www.marketwatch.com/story/12-traps-to-avoid-when-converting-to-a-roth-2010-01-21?dist=beforebell

[wellyes]

I think the lack of income limitations is what makes this such a novel thing...

Wowza, yeah, that would make a huge difference.

Say I'm a very wealthy 30 year old. I can put in $10,000/year - $5000 per spouse - to a Roth. When I'm 60 years old I'll have put in $300,000 in there, which I can pass on to my kids tax-free. With compound interest, probably closer to $500,000. And that's assuming they don't raise the amt that can be put in between then & now which is very unlikely.

That is one heck of a tax shelter.

[smiles33]

Not precisely sure who benefits from this new rule.

It benefits those of us who were barred from investing in Roth IRAs due to income ceilings. I put in 2 years' of Roth IRA investments and then we salaried out. It also helps reduce the size of our estate that is subject to estate taxes.



Yowza I tried to read about this and my head is spinning. I hate investment stuff. :o Are there income limitations? It really was just not at all clear to me. I found the Wikipedia (http://en.wikipedia.org/wiki/Roth_IRA)explanation pretty helpful and it confirms what my advisor told us. In short:

- contributions to Roth can be withdrawn tax-free (though you have to wait 5 years if you rolled the money over from an IRA)
- earnings up to $10K can be withdrawn for a first-time home buyer
- no mandatory distributions once you hit a certain age like traditional IRA
- your heirs can inherit it!


ETA:



That is one heck of a tax shelter. :yeahthat: Sorry, I was on the phone so there was a delay between writing and posting this post.

[mommylamb]

FWIW, You can convert some but not all of an existing IRA if you don't have the $$ to pay the tax on the whole thing.

I think part of the benefit is that taxes are at historic low points right now and are likely to be higher by the time we retire. Plus, all that time of tax free earning. I just wish I had an extra $20K hanging around right now... yeah, not.

[KrisM]

FWIW, You can convert some but not all of an existing IRA if you don't have the $$ to pay the tax on the whole thing.

I think part of the benefit is that taxes are at historic low points right now and are likely to be higher by the time we retire. Plus, all that time of tax free earning. I just wish I had an extra $20K hanging around right now... yeah, not.

Is that true for a 401k, too? I have one that is still with my old employer. Can I convert 2/3 of it now, and pay taxes on 1/3 in 2011, 1/3 in 2012 and then convert the rest in 2013 and pay taxes on the remaining 1/3 then?

And for estimating taxes, do I just calculate taxes on ordinary income figure out what the tax bracket is? I'm pretty sure adding this income would bump us up a bracket and be pretty expensive. Not sure where we'd get that extra money.

[mommylamb]

Is that true for a 401k, too? I have one that is still with my old employer. Can I convert 2/3 of it now, and pay taxes on 1/3 in 2011, 1/3 in 2012 and then convert the rest in 2013 and pay taxes on the remaining 1/3 then?

And for estimating taxes, do I just calculate taxes on ordinary income figure out what the tax bracket is? I'm pretty sure adding this income would bump us up a bracket and be pretty expensive. Not sure where we'd get that extra money.

Wish I could answer those, but I have no idea. My accountant just said you could do some buy not all if necessary, but we were talking about an IRA I have that was a roll over from an old 401K. So, I don't know how this works if you're trying to convert directly from a 401K to a roth. In regards to converting an IRA to a Roth under these rules, my understanding (and I could be wrong, but this is what I think it is) is that you can convert some or all of your IRA, but you have to do it in 2010. You can pay the taxes on it in either 2010 or 2011. No idea how they estimate the taxes though... that's something I'd get our accountant to do.