Roth IRA
- Thread starter ushdadude
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cocobird
Level 2 Member
Since IRA funds are designed for retirement, we invested for the long term. We have a mix of regular and ROTH IRAs. Depending on what our tax situation looks like if or when we need funds, we'll decide whether to pull from the taxable or tax free accounts. We don't put IRA money into certificates of deposit or similar monetary instruments.
Fortension
Level 2 Member
Couple things to add:
1) Consider your state and local taxes as well in the tax rate considerations. There's a reason besides the weather to retire to Florida. If your paying 9% state/local, Roths aren't looking so good if you're planning on moving to a lower tax area.
2) Diversification between IRAs (Roth/traditional) is generally a good idea
3) Oddly, it's better put your active trading (if you do any) in retirement accounts. There's no capital gains that have to be immediately taxed. Long-term capital gains are best held in non-retirement accounts. Dividend stocks are also well placed in retirement accounts since you won't have that income taxed immediately
4) If you're up against the maximum contributions, the Roths let you effectively put more money in each year.
1) Consider your state and local taxes as well in the tax rate considerations. There's a reason besides the weather to retire to Florida. If your paying 9% state/local, Roths aren't looking so good if you're planning on moving to a lower tax area.
2) Diversification between IRAs (Roth/traditional) is generally a good idea
3) Oddly, it's better put your active trading (if you do any) in retirement accounts. There's no capital gains that have to be immediately taxed. Long-term capital gains are best held in non-retirement accounts. Dividend stocks are also well placed in retirement accounts since you won't have that income taxed immediately
4) If you're up against the maximum contributions, the Roths let you effectively put more money in each year.
Fortension
Level 2 Member
and 5) Remember any tax deduction/credit phaseouts you might have. For instance, I'm around a child tax credit phase out which reduces the credit by 5% per $ over the threshold. So I've got a 25% (fed) + 5% (fed credit) + ~5% state = 35% effective marginal tax rate. It would be great if Turbotax gave you that kind of info directly for making these decisions, and not things like "Consider an IRA to reduce your taxes!"
I'm 100% invested in Roth versus Trad IRA right now. And let me explain why. If you make too much to get any traditional IRA tax deduction ($60-$70K for singles is where it phases out), then all of the above discussion about traditional versus roth IRA is meaningless. The Roth IRA crushes the Traditional on all fronts. I had some traditional IRA money back in 2010 that I was (un)fortunately able to convert to a Roth will very little tax bite because of the drop in value from the great recession. I had one other source of traditional money, a rolled over 401K that I actually rolled INTO my 401k at my current job (Verizon). Not all 401k programs allow this, but what it did was allow me to have no money/basis in any sort of traditional Ira. Now every year I contribute the full amount to a traditional IRA, and the minute it is posted in the account I do a roth conversion. Because I have no additional traditional IRA money, my conversion cost is zero. So despite making more than what the Roth Ira contribution limits allow, I have been fully funding a Roth IRA annually since 2010 with no adverse tax consequences.
If I understand correctly, you are doing a Backdoor Roth for people who have income levels above the IRA thresholds?
I do hear you about the issue with caps - but I don't like to discount the concepts of Roth vs Traditional since they appear elsewhere, such as in SEP plans that can remove that cap, bringing it back to a relevant conversation for those who are self employed or start a side business - so it is handy to have a passing knowledge of the pro's and con's of both Tax Deferring ,and Tax Free savings.
Good points - I'd argue 3 since active trading IMO creates higher risks and losing the downside protection of Cap loss collection doesn't outweigh cap gain avoidance... though I change my mind on that every few years
Understood. There are lots of ways to skin the cat. I actually had to go through quite a few machinations to set up to do the backdoor Roth, but I am going to ride it until they close that loophole. Although I guess it isn't necessarily a loophole, because they are hoping for current income/taxes from people that are doing taxable roth conversions. The gov't got the one huge surge in 2010 when they allowed people to split the taxes over two years (and probably helped plug some budget hole somewhere). And now I expect they receive enough tax from Roth Conversions that they are in no rush to close this. If I had had to pay significant taxes when I did my initial Roth Conversion, I'm not sure I would have bit the bullet, in which case I would have fallen behind every year as I continued to fund my traditional IRA...
Fortension
Level 2 Member
I think we could debate the difference between "active trading" and "high risk / risk on" strategies. If you avoid the bad behavioral issues associated with active trading, active trading shouldn't be more inherently risky from a statistical point of view.Good points - I'd argue 3 since active trading IMO creates higher risks and losing the downside protection of Cap loss collection doesn't outweigh cap gain avoidance... though I change my mind on that every few years
Of course, for your cap loss argument to work, you would first have to convince the 90% of people that believe the myth that you should cover your losses with cap gains each year.
But for the other 10%, it's a consideration.
A big topic, I agree! But yeah, I think poorly of most active traders, but not necessarily active trading.I think we could debate the difference between "active trading" and "high risk / risk on" strategies. If you avoid the bad behavioral issues associated with active trading, active trading shouldn't be more inherently risky from a statistical point of view.
Of course, for your cap loss argument to work, you would first have to convince the 90% of people that believe the myth that you should cover your losses with cap gains each year.
I personally think that being able to reap Cap Losses against income can make taxable active trading an interesting proposition.
fulthrust7
Level 2 Member
I just met my FA and I was advised that any Roth conversion results in a 1099R for that entire amount and is treated as taxable income. Your formula in the resource suggests (in the absence of other IRAs) that 100% is tax free (obviously post tax going in). But as I stated before and as I was advised again, you're getting taxed at your income tax rate on post tax money. Where's the confusion? Whose wrong?
Mountain Trader
Level 2 Member
Your advisor is correct that converting a regular IRA to a Roth IRA is a taxable event. Think of it this way-taking money out of a regular IRA is almost always a taxable event, and that's what you're doing on a conversion:taking money out of a regular IRA, then putting it into a Roth IRA.
You may be mixing up taking money out of a Roth IRA, which can be non-taxable with certain exceptions. Taking money earned in the Roth IRA out of the Roth IRA is taxable if the Roth has not been open for at least 5 years. By the way, I think the 5 year rule offers another edge in that you only have to have the account open for 5 years to make distributions of earnings not taxable. Thus, if you put money in during the first 5 years, earning off those funds would not have to wait another 5 years to be non-taxable; rather, all earnings are non-taxable once the account meets the 5 year rule.
As I posted before, this stuff can be complex and it is good you are seeking professional advice-everyone should.
The confusion surrounds whether you are talking a back door Roth or a Traditional IRA to Roth conversion. As @Mountain Trader correctly states the latter is a taxable event, and as your FA states results in a 1099-r
A backdoor Roth is different- you don't deduct on the way in, so you don't get stung on the way out. There is no 1099-r for this.
So there is no confusion- if you have no other IRAs as you mentioned in your post, there simply cannot be a taxable event, not only is it not the case by the rules - it's just illogical. If your advisor doesn't understand this (and it's a loophole so they may not) you should consider another advisor.
My advice would be to look for a CFP with a bit of experience- though in fairness they don't teach this in CFP school so it's no guarantee...
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Tom Capone
Level 2 Member
You shouldn't be getting tax advice from your FA. They are not really financial advisors, they are financial product sales people.
Matt and MountainTrader are correct, but to clarify, when your only IRA is a non deductible IRA and you convert to a Roth, you pay taxes on the taxable portion of the withdrawal. If there were no earnings on the non deductible IRA, none of it is taxable. If there were earnings, you would pay taxes on the earnings.
Matt and MountainTrader are correct, but to clarify, when your only IRA is a non deductible IRA and you convert to a Roth, you pay taxes on the taxable portion of the withdrawal. If there were no earnings on the non deductible IRA, none of it is taxable. If there were earnings, you would pay taxes on the earnings.
Yes and No. Depends on who your FA is. I know FAs that are CFPs, T&E lawyers, CPAs etc... they are very different from a series 7 and insurance licensed salesman. You find a lot more of the latter of course.
And to the rest of your point, I agree entirely, good to mention the tax on earnings too - that is why when we look at a backdoor Roth it is advised to swap it over asap, within a few days, so tax should be minimal.
Tom Capone
Level 2 Member
Sure, an FA can have other qualifications, but someone who is just an FA, is not trained in tax law.
BTW, congrats on the baby!
BTW, congrats on the baby!
if you sell what would you buy that you know doesn't go down? I believe the only things that don't go down are ponzi schemes.
ushdadude
Level 2 Member
agreed. this is a reliable investment for the future so I'll stick it out.