Roth Conversion and Tax Overhaul

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RoLev
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Roth Conversion and Tax Overhaul

Post by RoLev » Sat Dec 25, 2010 1:18 pm

The conventional wisdom is that tax rates have nowhere to go but up. However, there seems to be increasing talk about the need for a major overhaul of the income tax system that wll actually result in a substantial decrease in the top marginal rate (27% in one proposal). This would be achievable, and still result in significant increases in tax revenues, because deductions would be sharply curtailed.

This is the one factor that is giving me some pause about converting my traditional IRA to a Roth.

How are others here weighing that factor?

RoLev

letsgobobby
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Post by letsgobobby » Sat Dec 25, 2010 2:17 pm

"don't count your chickens before they hatch."

"I'll see it when I believe it."

"A bird in hand is worth two in the bush."

ad nauseam

supersharpie
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Re: Roth Conversion and Tax Overhaul

Post by supersharpie » Sat Dec 25, 2010 3:02 pm

RoLev wrote:The conventional wisdom is that tax rates have nowhere to go but up. However, there seems to be increasing talk about the need for a major overhaul of the income tax system that wll actually result in a substantial decrease in the top marginal rate (27% in one proposal). This would be achievable, and still result in significant increases in tax revenues, because deductions would be sharply curtailed.

This is the one factor that is giving me some pause about converting my traditional IRA to a Roth.

How are others here weighing that factor?

RoLev
This is pie in the sky talk for high earners. --political commends deleted--

retiredjg
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Re: Roth Conversion and Tax Overhaul

Post by retiredjg » Sat Dec 25, 2010 3:09 pm

RoLev wrote:How are others here weighing that factor? RoLev
I'm not giving it any weight myself.

RoLev
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Post by RoLev » Sat Dec 25, 2010 5:07 pm

This is pie in the sky talk for high earners. What you are describing is a redistribution of tax liability to weigh more heavily on low and middle class earners who are already suffering from a greater disparity in wealth distribution than at any point in recent memory. Do you really think the 90-95% of Americans who would pay higher taxes after such an overhaul would reelect the pols who supported the change?

I don't either.
That's not at all what I'm describing.

I'm describing the tax overhaul proposal of the bipartisan deficit reduction commission appointed by our current President. See page 24 of the attached proposal:

http://www.fiscalcommission.gov/sites/f ... _Draft.pdf

Under the proposal, the top marginal rate would be reduced to between 23% to 28%, depending upon the level of tax deductions that are done away with. This is a revenue-raising proposal that is not intended to favor high earners. The effect of the loss of deductions on high earners will more than offset the reduced top marginal rate.

However, for purposes of evaluating a Roth conversion, it is your marginal rate that matters, rather than any lost deductions (except, perhaps, the deduction for state income taxes). If your marginal rate decreases, you will likely be better off converting then, rather than now.

RoLev

RoLev
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Post by RoLev » Sat Dec 25, 2010 5:18 pm

By the way, under the proposal of the bipartisan deficit reduction commission, almost all marginal rates would decrease, not just the top marginal rate. So the issue is relevant to all who are considering converting a traditional IRA to a Roth.

RoLev

letsgobobby
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Post by letsgobobby » Sat Dec 25, 2010 6:38 pm

discussing tax policy is against forum rules. However, I can add 1+1 = 2. 1) enormous structural deficits for many years into the future and 2) historically low taxes as a percent of GDP = higher tax rates in the future, not lower. If the commission's proposals regarding closing off deductions were to come true, rates still wouldn't go down... there's not enough revenue as it is.

Leesbro63
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Post by Leesbro63 » Sat Dec 25, 2010 6:46 pm

My own guess is that, EXACTLY what happened in 1986 would happen again. The deal would take away current "tax breaks" and lower the rates. For a few years, at most. Then rates would go back up, like they "read my lips" did in 1990. That being said, it COULD BE that there will be lower rates for a while in which conversion would be a better deal than today. But I am still doing the conversion because I just don't believe it in my bones.

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Doc
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Post by Doc » Sun Dec 26, 2010 1:33 pm

RoLev wrote:
However, for purposes of evaluating a Roth conversion, it is your marginal rate that matters, rather than any lost deductions (except, perhaps, the deduction for state income taxes). If your marginal rate decreases, you will likely be better off converting then, rather than now.
Not necessarily so. The various deductions can greatly influence your "marginal" tax rate because of phaseouts, AMT etc. These factors can greatly increase your marginal rate at withdrawal. When making the kind of analysis you are attempting it is important not to confuse "marginal" tax rate with "Tax Bracket" rate.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

Beagler
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Post by Beagler » Sun Dec 26, 2010 1:49 pm

It does not take a lot of thought to devise ways that would make Roth withdrawals count as some form of income (e.g., AMT). If you're going to retire in 20 years, there are a lot of Congressional seatings between now and then; they can change taxation rules with the stroke of a pen.

Anyone else remember when Social Security benefits were not taxable?
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

Dead Man Walking
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Post by Dead Man Walking » Mon Dec 27, 2010 4:45 am

Many of your questions are discussed at Fairmark.com.

DMW

RoLev
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Post by RoLev » Tue Dec 28, 2010 1:22 am

Dead Man Walking wrote:Many of your questions are discussed at Fairmark.com.

DMW
Thanks. That site seems like a helpful resource.

RoLev

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