roth IRA conversion yes or no?


J

jsgusps

I plan to retire at the end of January 2007. I will have
$157,000 in a 457 plan and $97,000 as a partial distribution
from a retirement plan that I plan to roll into a
traditional IRAs upon retirement; and $21,000 already in a
traditional IRA.

My thought is to try to convert the 457 and traditional
IRAs into Roths before the magic age of RMDs (70.5) and,
coincidently for me, the year that the current tax rate may
change for the worse.

If I convert the $21,000 traditional IRA this year to a
Roth, it will throw me in the 28% bracket . My son tells me
that I should leave the money in traditional IRAs, take RMDs
and not take the big tax hit, now or later; just let my
heirs pay the taxes if there is anything left over. I
believe that if I live another 20 years, God willing, I
will be paying more taxes in the long run just from regular
monthly income, interest income and RMDs. And be paying
more taxes at a time when it will take more of my income to
live on due to inflation.

Also, when RMDs begin, should I have "surplus" money to
invest, those investments will make me more taxable money.
If I have it in Roth accounts it is still making money, but
I can take out money only when I want and not have to worry
about additional taxes. If I leave money for my heirs,
that's great, but my main interest is taking care of myself
over my lifetime.

I am single, 66 =BD and will take the standard deduction
this year (but not next). My AGI for 2006 will be about
$73,700.

I expect an annual income after retirement of about $70,
300. I have no debt. My cost of living is less than
two-thirds of my current income. I have but 3 years to
convert to Roths before RMDs begin. It would be a big tax
hit in years 2007- 2010 to convert the new $264,000 (due
at retirement) over to Roths, but I am thinking that I
should convert at least part of that, and for sure the
$21,000 IRA this year. Am I on the wrong track?
 
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P

Phil Marti

I plan to retire at the end of January 2007. I will have
$157,000 in a 457 plan and $97,000 as a partial distribution
from a retirement plan that I plan to roll into a
traditional IRAs upon retirement; and $21,000 already in a
traditional IRA.

My thought is to try to convert the 457 and traditional
IRAs into Roths before the magic age of RMDs (70.5) and,
coincidently for me, the year that the current tax rate may
change for the worse.

If I convert the $21,000 traditional IRA this year to a
Roth, it will throw me in the 28% bracket .
Since there's not a lot of time to do anything for 2006, I'd
convert enough of the traditional to take you to the top of
the 25% bracket now. Then sit down with a fee-based
financial planner to figure out what to do in 2007 and out.
 
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J

joetaxpayer

I plan to retire at the end of January 2007. I will have
$157,000 in a 457 plan and $97,000 as a partial distribution
from a retirement plan that I plan to roll into a
traditional IRAs upon retirement; and $21,000 already in a
traditional IRA.

My thought is to try to convert the 457 and traditional
IRAs into Roths before the magic age of RMDs (70.5) and,
coincidently for me, the year that the current tax rate may
change for the worse.
Your motives are good, but the results may be a wash.
Currently, AGI over $74,200 is 28% money, and over $154,800
is 33%.

My Roth conversion advice centers around 'topping off' the
current bracket in an attempt to avoid getting forced into
the next. An 80 yr old who has income (including RMD) of
about $25,000. I advise her to convert just enough to get
the taxable income right to $30,650 (the jump from 15% to
25%. Bottom line, she pays tax at 15% to avoid having ever
increasing RMDs push her up to 25%.

In your case, you look like you will be straddling the 28%
bracket into retirement. If your heirs are in a lower
bracket, they would be better off if you left the money pre
tax. I missed one point - why will you not take the standard
deduction next year? Besides the forced RMD at 70.5, is
there some else happening you haven't spelled out?

JOE
JoeTaxpayer.com
 
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T

Taxxcpa

I plan to retire at the end of January 2007. I will have
$157,000 in a 457 plan and $97,000 as a partial distribution
from a retirement plan that I plan to roll into a
traditional IRAs upon retirement; and $21,000 already in a
traditional IRA.

My thought is to try to convert the 457 and traditional
IRAs into Roths before the magic age of RMDs (70.5) and,
coincidently for me, the year that the current tax rate may
change for the worse.

If I convert the $21,000 traditional IRA this year to a
Roth, it will throw me in the 28% bracket . My son tells me
that I should leave the money in traditional IRAs, take RMDs
and not take the big tax hit, now or later; just let my
heirs pay the taxes if there is anything left over. I
believe that if I live another 20 years, God willing, I
will be paying more taxes in the long run just from regular
monthly income, interest income and RMDs. And be paying
more taxes at a time when it will take more of my income to
live on due to inflation.

Also, when RMDs begin, should I have "surplus" money to
invest, those investments will make me more taxable money.
If I have it in Roth accounts it is still making money, but
I can take out money only when I want and not have to worry
about additional taxes. If I leave money for my heirs,
that's great, but my main interest is taking care of myself
over my lifetime.

I am single, 66 =BD and will take the standard deduction
this year (but not next). My AGI for 2006 will be about
$73,700.

I expect an annual income after retirement of about $70,
300. I have no debt. My cost of living is less than
two-thirds of my current income. I have but 3 years to
convert to Roths before RMDs begin. It would be a big tax
hit in years 2007- 2010 to convert the new $264,000 (due
at retirement) over to Roths, but I am thinking that I
should convert at least part of that, and for sure the
$21,000 IRA this year. Am I on the wrong track?
I think you should begin converting part of your IRA each
year provided you meet elegiblity to do so. If you
contribute too much it could put you in a higher bracket, so
incremental conversions may be best. Once the tax is paid,
there will be no further tax to your heirs. Of course, when
you convert to a Roth, part goes to taxes, but it reduces
furure RMDs also. I've written some blogs about RMDs, Roth
IRA and other related topics. The one for Roth IRAs is at
http://wwwtaxman.blogspot.com/2006/12/roth-ira.html

A list of other topics will also be shown when you access the
blog can it used, for the purpose of avoiding penalties
 
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A

Arthur Kamlet

I plan to retire at the end of January 2007. I will have
$157,000 in a 457 plan and $97,000 as a partial distribution
from a retirement plan that I plan to roll into a
traditional IRAs upon retirement; and $21,000 already in a
traditional IRA.

My thought is to try to convert the 457 and traditional
IRAs into Roths before the magic age of RMDs (70.5) and,
coincidently for me, the year that the current tax rate may
change for the worse.

If I convert the $21,000 traditional IRA this year to a
Roth, it will throw me in the 28% bracket . My son tells me
that I should leave the money in traditional IRAs, take RMDs
and not take the big tax hit, now or later; just let my
heirs pay the taxes if there is anything left over. I
believe that if I live another 20 years, God willing, I
will be paying more taxes in the long run just from regular
monthly income, interest income and RMDs. And be paying
more taxes at a time when it will take more of my income to
live on due to inflation.

Also, when RMDs begin, should I have "surplus" money to
invest, those investments will make me more taxable money.
If I have it in Roth accounts it is still making money, but
I can take out money only when I want and not have to worry
about additional taxes. If I leave money for my heirs,
that's great, but my main interest is taking care of myself
over my lifetime.

I am single, 66 =BD and will take the standard deduction
this year (but not next). My AGI for 2006 will be about
$73,700.

I expect an annual income after retirement of about $70,
300. I have no debt. My cost of living is less than
two-thirds of my current income. I have but 3 years to
convert to Roths before RMDs begin. It would be a big tax
hit in years 2007- 2010 to convert the new $264,000 (due
at retirement) over to Roths, but I am thinking that I
should convert at least part of that, and for sure the
$21,000 IRA this year. Am I on the wrong track?
One additional item to be aware of, is if the conversion
income increases the cost of your Medicare premium, it
becomes sort of a hidden tax.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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