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What To Withhold When You Are Forced To Take Rmd

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Bob and Big Red,

 

I have most of my tax deferred in a roll over IRA and have about $50,000 in a Roth. I am 65. To convert some or all of my roll over IRA would invite a tax bite and thus reduce my over all principle for future growth. You have to run some numbers for me to see a benefit in doing this now. I am happy leaving the it in for the next 6 years tax deferred and then control the amount at 70.5. If I knew that taxes were increasing significantly, then I would think about converting. But nobody knows the future, unfortunately.

Of course, there is merit with what you are say, for example, if you are leaving it all to heirs, but I have no heirs and plan on leaving what ever is left (if I am lucky) to charity. I don't see the benefit for me as I already have $50,000 in Roth right now. To increase my Roth now would be counter productive.

 

Is there something else I am missing or are you only talking with people who have heirs?

 

Steve

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Guest Joel L Frank

THE FOLLOWING COMES DIRECTLY FROM THE INFORMATION PORTAL OF THE LOS ANGELES UNIFIED SCHOOL DISTRICT (LAUSD). EMPLOYEES AND RETIREES OF THIS SCHOOL DISTRICT SHOULD KNOW, IN THEIR OWN BEST INTERESTS, THE ADVANTAGES AND DISADVANTAGES OF INVESTING IN A TRADITIONAL (PRE-TAX) 403(b) and/or a Roth (POST-TAX) 403(b)....IN A SIMILAR FASHION THE EMPLOYEE/RETIREE SHOULD INVESTIGATE THE TRADITIONAL (PRE-TAX) 457(b) AND THE ROTH (POST-TAX) 457(b).

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"Roth 403(b)

 

This is a provision that permits employees to irrevocably designate all or a portion of their 403(b) as an after-tax Roth contribution. This type of contribution will not lower the employee's taxable income. However, distribution of Roth designated funds in retirement will not be subject to taxation.

Participants have the option of making pre-tax 403(b) contributions, Roth 403(b) contributions, or as a combination of the two. Total contributions cannot exceed the year's contribution limit. Not all employers offer a Roth 403(b), nor are they required to do so. Check with your employer for details.

 

How a Roth 403(b) Is Different From a Roth IRA

 

The tax treatment of a Roth 403(b) and a Roth IRA is similar (after-tax contribution, tax-free withdrawal in retirement). However, the Roth 403(b) is an employer-based plan, while the Roth IRA is an individual-based plan. Distribution rules are different. Roth IRA contributions can be accessed at any time (earnings after five years or until age 59½, whichever is later). The Roth 403(b) can be accessed only with the occurrence of a distributable event (age 59½, separation from service, disability, or death)."

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Thanks, Joel for the information. This must be some boilerplate legalese, something so brand new that it hasn't been distributed yet or, perhaps, I just missed it. Anyway, Steve, Big Red and myself are discussing the many valid reasons to do an IRA conversion. Any thoughts?

 

Steve,

 

I'm still considering my response.....

 

Bob

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Guest Joel L Frank

Its a given that we cannot predict the future---how boring life would be if we could!

 

The mounting deficits to our federal budget must be reduced either by increasing tax rates or by decreasing spending or a combination of the two. Its prudent to predict, in my view, that the income tax rates 10 years from now will be higher than they are today.

 

Having said that, one might want to pay the tax now and be done with it! Pay the tax from sources other than the pre-tax 403(b). The interest/dividends/capital gains distributions from mutual funds are taxable each and every year even if do not withdraw a dime. If you sell a stock, the gain is taxable so your growth is impacted. It might be a good idea to dig into these accounts to pay the tax due on the conversion of the pre-tax 403(b) to a Roth IRA. After the Roth IRA has been opened for 5 years all withdrawn gains are tax-free provided you are 59-1/2. Withdrawal of contributions is always tax free because the tax has been paid up front.

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Its fruitless to make a major decision on how one invests on a probability of an event happening, any event. People predict all kinds of things and what ends up actually happening is something that few predicted. Its always a surprise!

If one is not comfortable with your asset allocation, change it. But for heaven's sake don't change it because of what the crowd, financial pundits or financial media nitwits are saying 24/7. Get your asset allocation set up that you can live with through thick or thin. Its not about luck or skill, your investment success is based on behavior. There will always be uncertainty, buck up and deal with it.

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Bob and Big Red,

 

I have most of my tax deferred in a roll over IRA and have about $50,000 in a Roth. I am 65. To convert some or all of my roll over IRA would invite a tax bite and thus reduce my over all principle for future growth. You have to run some numbers for me to see a benefit in doing this now. I am happy leaving the it in for the next 6 years tax deferred and then control the amount at 70.5. If I knew that taxes were increasing significantly, then I would think about converting. But nobody knows the future, unfortunately.

Of course, there is merit with what you are say, for example, if you are leaving it all to heirs, but I have no heirs and plan on leaving what ever is left (if I am lucky) to charity. I don't see the benefit for me as I already have $50,000 in Roth right now. To increase my Roth now would be counter productive.

 

Is there something else I am missing or are you only talking with people who have heirs?

 

Steve

Steve, From what I glean about your situation I think you are on the right path. The end game of your money will go to a user that will no tax liability so deferring it as long as you can and only taking minimums make sense.

 

The conversion strategy make sense if you have an estate tax issue and/or will have more than enough resources to survive. The fact that you do not need to take RMD's from Roth allows for a large amount of accumulation in framework that can allow large amounts of money to accumulate that has no tax paid against it. Also, when when people get up in age their tax rate is often lower than the heirs that will have to take it out in future years so there is an arbitrage opportunity if A is at 15% and the beneficiaries are at 28% it and you want to pay now. And it can stay tax qualified in the roth.

 

Does that make any sense?

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Guest Joel L Frank

Its fruitless to make a major decision on how one invests on a probability of an event happening, any event. People predict all kinds of things and what ends up actually happening is something that few predicted. Its always a surprise!

If one is not comfortable with your asset allocation, change it. But for heaven's sake don't change it because of what the crowd, financial pundits or financial media nitwits are saying 24/7. Get your asset allocation set up that you can live with through thick or thin. Its not about luck or skill, your investment success is based on behavior. There will always be uncertainty, buck up and deal with it.

Steve,

 

Your comment has absolutely nothing to do with the question, which is: Should I remain subject to RMD or eliminate it by converting to a Roth IRA.? In either case the basket of investments is unchanged.

 

Joel

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Guest Joel L Frank

A tax-deferred account might be the best estate planning tool for those that have named a charity as beneficiary of their retirement account because the charity receives its "inheritance" tax-free.

 

That being said, RMD must begin at 70.5. For the charity to do really well, the owner of the account needs to die prematurely. RMD amounts increase as one ages, resulting in a diminishing balance. The life expectancy for a male age 65 is 21+ years and for a female it is 24+ years. If the account owner lives no longer or shorter than his/her life expectancy he/she has paid income tax each and every year and most probably would have been better off converting to a Roth IRA especially if income tax rates increase, even gradually, over the next 21+/24+ years. The decision to convert to a Roth IRA is strengthened in those cases where withdrawals in excess of RMD is contemplated. The devil is in the detail.

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Guest Joel L Frank

Steve,

 

Please be specific and tell us what it is that you do not understand. I will try to amplify for you.

 

Joel

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Big Red,

 

Your post makes perfect sense to me. I appreciate your POV and agree there are many reasons to do an IRA conversion.... they all have to be respected. Investing and retirement planning are personal and have many variables. Thanks for responding to my plea!!!!

 

Bob

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Big Red,Your post makes perfect sense to me. I appreciate your POV and agree there are many reasons to do an IRA conversion.... they all have to be respected. Investing and retirement planning are personal and have many variables. Thanks for responding to my plea!!!!Bob

Hi Bob

 

Just to finish this discussion and it was a good one, may I suggest that just because people might disagree doesn't mean disrespect.

In the final analysis people should be contributing to a Roth all the way through their working careers. Converting because of a unknown future tax event or for any reason beyond your control is speculation! We encourage investing in both 403b and the Roth in the broad market with low cost index funds from Tia Cref or vanguard.

 

Regards,

Steve

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Guest Joel L Frank

 

Big Red,Your post makes perfect sense to me. I appreciate your POV and agree there are many reasons to do an IRA conversion.... they all have to be respected. Investing and retirement planning are personal and have many variables. Thanks for responding to my plea!!!!Bob

Hi Bob

 

Just to finish this discussion and it was a good one, may I suggest that just because people might disagree doesn't mean disrespect.

In the final analysis people should be contributing to a Roth all the way through their working careers. Converting because of a unknown future tax event or for any reason beyond your control is speculation! We encourage investing in both 403b and the Roth in the broad market with low cost index funds from Tia Cref or vanguard.

 

Regards,

Steve

 

Steve,

 

If you believe that "people should be contributing to a Roth all the way through their working careers" you must also believe that tax rates will be higher during their payout years when taxable RMD must be taken from their tax-deferred accounts. This is the only rationale for paying the tax now through a Roth.

 

Q.: Why do you refer to conversion to a Roth as speculation as to future tax rates but "contributing to a Roth all the way through their working careers" as not speculation? Please clarify.

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It's part of a long term plan. Converting means changing your plan because of a future tax event. Doing so is speculation. Investing in a Roth through one's career is a long term plan.

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Steve,

 

Please be specific and tell us what it is that you do not understand. I will try to amplify for you.

 

Joel

I don't understand how you can predict the future of tax rates. I don 't think you can unless you have a crystal ball, do you? You said that the fed debt must be paid by increasing taxes.

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