client is in 20% tax bracket.
Young client age 31 has 2 IRA’s one has 23000 and one has 73000. As she gets older she will be in a higher tax bracket. is it a good idea to convert both IRAs to a Roth?
Young client age 31 has 2 IRA’s one has 23000 and one has 73000. As she gets older she will be in a higher tax bracket. is it a good idea to convert both IRAs to a Roth?
Permalink Submitted by Alan Spross on Mon, 2009-08-24 21:53
Possibly, but there are many variables that apply to this very complex decision. By 20%, you probably mean federal @ 15% and state @ 5%. One possible approach would be to convert up to the top of her 15% bracket each year, which might be very little or quite an amount depending on where her taxable income is each year, but either way this would still be far less than converting all of these IRAs at once.
By doing this gradually, if things change, she can always stop. If she loses a job or becomes disabled, so would obviously stop the conversions lacking other income or assets. If Congress passes a VAT tax, basically a national sales tax, the value of a Roth would be diluted somewhat, and she could stop converting.
Alot of the decision depends on prospects for the client individually, probably more than even tax policy. For example, a young MD that has established a good practice and is NOT a big spender, will probably accumulate large amounts of retirement assets. Since their success appears very likely, they should be more aggressive converting than someone with fewer guarantees and more of a spending habit. It is good to have a basic plan for conversions, but the plan needs to be revisited every year based on changes that have occurred.
Permalink Submitted by george collins on Fri, 2009-08-28 21:10
Alan, how does a VAT impact a roth? I am retired and in the 28+6% state margial tax rate going to probably 30+6% rate under the present administration. Unless SS, and Roths are taxable under the VAT–the VAT looks good to me?
jerry
Permalink Submitted by mk foss on Fri, 2009-08-28 21:31
The VAT doesn’t directly impact the Roth. Converting an IRA and paying tax on it or just contributing after-tax money are all based on the premise that you will avoid income taxes on the earnings. If there is no income tax because it’s been replaced by a VAT – all of that planning will have been for nought.
The Value Added Tax applies in the manufacturing process. If a publisher transforms paper into a book, the increase in value between the raw materials and the product is a value added. That value added would be taxed. Many goods would have higher prices because a tax has been imposed at each level of the production process. As far as the consumer is concerned it’s like a sales tax but it’s not imposed on the consumer it’s imposed on each producer.
Permalink Submitted by george collins on Fri, 2009-08-28 21:41
Mary Kay—-Understand and thanks.
I will reexamine my thoughts about moving out of this country before congress destroys it.
Roth people will be a little upset if this happens. Guess I will keep a few $$ in the IRA
jerry
Permalink Submitted by Alan Spross on Fri, 2009-08-28 22:55
If a VAT is passed to boost Treasury coffers, it will probably be in addition to the income tax and probably in lieu of even larger income tax rate increases. It would hurt people that did large total conversions relative to those who did none, but for those who still have large TIRA values along with modest Roths, the VAT would replace some of the additional income tax rate load on TIRA RMDs and other distributions. I think if the VAT appears to be materializing, it does not mean to stop converting or that prior conversions were in error if they were a modest %, but it probably means that you would put a lower ceiling on the total amount of pre tax assets you planned to convert.