IRA converting - tiny gains w/some losses

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ps56k
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IRA converting - tiny gains w/some losses

Post by ps56k »

We have a couple of IRAs with Fidelity - and not really paid that much attention to them,
and only started contributing later in life...
we are both in late 50's - early retirement soon...
have lots of investments outside of IRA - Schwab, Vanguard, TRowe, along with wife's future pension.

We have the usual basic IRA conversion question - to do it, or not -
They are pretty small, with minimal growth, and even some losses over the years.

Fidelity IRA - traditional -
Mine - $200k, with cost basis of $210k
Wife - $130k, with cost basis of $110k

SO - should we convert to Roth to make it easier, tax wise in the future ?
or just not worth the effort ?
livesoft
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Re: IRA converting - tiny gains w/some losses

Post by livesoft »

In my world "pretty small" is like $5,000 or $10,000, not more than $300,000.

As for conversion, it all depends on many things. I would not convert unless the tax hit was close to 0%. See www.i-orp.com and the how to pay ZERO taxes in retirement thread.
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Alan S.
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Re: IRA converting - tiny gains w/some losses

Post by Alan S. »

How are you defining "cost basis"? For your TIRA accounts, it is the sum of non deductible contributions you made plus the rollover of after tax contributions from an employer plan. It is NOT total amount you contributed unless ALL of your contributions came from the prior two sources. So, are your numbers the actually cost basis or just the value of your TIRA accounts? If you did make non deductible contributions, did you report them on Form 8606 each year?

Once you determine what your cost basis is for the IRA accounts, you can analyze conversions. The higher your actual cost basis, the more beneficial conversions would be.
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ps56k
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Re: IRA converting - tiny gains w/some losses

Post by ps56k »

Alan S. wrote:How are you defining "cost basis"?
Good point - I just happen to be looking at my Quicken screen and took the Market vs Cost totals..
I'll have to dig thru my paper files for the IRA stuff and see how it all breaks down.
I think some years are deductable and some are not - what a mess to follow... not sure if there is a simple trail ?
Will take a look at what TurboTax printed out and see if there are any IRA forms.
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ps56k
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Re: IRA converting - tiny gains w/some losses

Post by ps56k »

livesoft wrote:In my world "pretty small" is like $5,000 or $10,000, not more than $300,000.
Yikes - the way I read things around here, it just seems that if you are not sitting with a large IRA investment, then you are in trouble. I could never figure out how you get a large IRA with just a yearly deposit of $2,500 to $5,500 ?
bsteiner
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Re: IRA converting - tiny gains w/some losses

Post by bsteiner »

livesoft wrote:...As for conversion, it all depends on many things. I would not convert unless the tax hit was close to 0%....
Assuming you have other money with which to pay the tax on the conversion, the conversion makes sense to the extent you can convert at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply when you or your beneficiaries would otherwise receive distributions.

For example, assume a constant 30% tax rate. You have a $10,000 traditional IRA and $3,000 of other money. If you convert, you have a $10,000 Roth IRA that's all yours. If it grows you $100,000, you have $100,000. Suppose you don't convert. Your $10,000 traditional IRA grows to $100,000. You or your beneficiaries withdraw the $100,000, pay $30,000 tax, and have $70,000 left. You still have your taxable account, but it grows to less than $30,000 since the income and gains on it are taxable each year.

The Roth provides other benefits. There are no required distributions at 70 1/2. If you're in a state that has a state income tax, getting the income tax out of the estate provides a benefit since the income tax deduction for estate taxes on the IRA covers the Federal, but not the state, estate tax.

In many cases, it makes sense to spread the conversion over a number of years, to avoid bunching the income into a high tax bracket in the year of the conversion.

In many cases, the IRA owner will be in a lower bracket upon retirement, so it makes sense to wait until retirement to convert, or to begin converting.

In many cases, traditional IRA benefits are a good way to fill up the 15% bracket. In these cases, IRA owners would leave behind (in other words, not convert) the amount that they can use later on to fill up the 15% bracket, either by withdrawals or by conversions.

There's also the possibility that someone in a relatively high tax bracket might find himself/herself in a low bracket in some future year, which would provide an opportunity for a conversion. We had someone who owned an interest in an S corporation in which he actively participated, and there was one year when the business lost money, and he took advantage of that by doing a large conversion that year.

Nevertheless, there are many advantages to the Roth conversion, so long as you can convert at a tax rate less than, equal to, or only a little bit higher than the tax rate that would otherwise apply to distributions.
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Epsilon Delta
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Re: IRA converting - tiny gains w/some losses

Post by Epsilon Delta »

ps56k wrote:
livesoft wrote:In my world "pretty small" is like $5,000 or $10,000, not more than $300,000.
Yikes - the way I read things around here, it just seems that if you are not sitting with a large IRA investment, then you are in trouble. I could never figure out how you get a large IRA with just a yearly deposit of $2,500 to $5,500 ?
You can get a large IRA by rolling over a 401(k). The $17,500 limit on 401(k) contributions plus any employer match gets money in faster. If you've made both 401(k) and direct IRA contributions we're talking over $200,000 in contributions per decade.

Alternatively you could wait for a bull market. If you started in 1980 and made maximum contributions ($2000 at that time) to the S&P 500 index you had well over $200,000 by 2000, and you'd have about the same today. :mrgreen:
SGM
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Re: IRA converting - tiny gains w/some losses

Post by SGM »

If your basis is so high, then the taxes will be pretty low. I doubt that basis is accurate unless you have had a rather low return.

If you do convert you will need to fill 8606 forms for each year you added to the traditional IRA. It has been 3 years since I did this. Maybe it was only the years that you had a non-deductible contribution. I downloaded a form for each year from the irs.gov website. The past 8606 forms had to be sent in separately from the 1040.

When I was considering a Roth conversion I read James Lange's books on IRAs and conversions see http://www.rothira-advisor.com as well as reviewed other literature and the BH website. I also ran some numbers at http://www.i-orp.com. For me it made sense to convert even though my basis was lower. There are lots of arguments pro and con for converting.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
Default User BR
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Re: IRA converting - tiny gains w/some losses

Post by Default User BR »

Epsilon Delta wrote:You can get a large IRA by rolling over a 401(k). The $17,500 limit on 401(k) contributions plus any employer match gets money in faster.
Also after-tax contributions to qualified plans with in-service rollovers.


Brian
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Re: IRA converting - tiny gains w/some losses

Post by Default User BR »

ps56k wrote:
Alan S. wrote:How are you defining "cost basis"?
Good point - I just happen to be looking at my Quicken screen and took the Market vs Cost totals..
I'll have to dig thru my paper files for the IRA stuff and see how it all breaks down.
I think some years are deductable and some are not - what a mess to follow... not sure if there is a simple trail ?
Will take a look at what TurboTax printed out and see if there are any IRA forms.
Non-deductible contributions have to be recorded by filing Form 8606. If you haven't been doing that, then you have a problem. If you haven't properly recorded a non-deductible contribution, then the IRS will assume it is taxable. Hopefully you have your returns and records of contributions covering this period and can check for IRA deductions and 8606 forms. If you have some that weren't recorded, you can file 8606 on its own.


Brian
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