Comments on: Roth Conversion Fail http://www.joetaxpayer.com/roth-conversion-fail/ Financial Commentary For The Average Joe Mon, 06 Feb 2012 21:56:17 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: JOE http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21461 JOE Mon, 26 Jul 2010 12:23:38 +0000 http://www.joetaxpayer.com/?p=3038#comment-21461 State tax is one of the little discussed wild cards in this discussion. You are at 9.3% state now. Who can say where you will want to live in retirement? The chance you move to a lower tax state (or no-tax state) shouldn't be ignored. The AMT impact deserves a post of its own, but let me offer, TurboTax is great for the "what-ifs" - I set up a return that would put a couple just into the 28% bracket (over $137,050 taxable in 2009). But when I add income, the next $1K is taxes at $325 due to AMT. The adviser suggesting conversions who only looks at marginal rates does a disservice to the client. So lond as when you say you were in the 25% bracket you meant that $10K of conversion increased your federal tax $2500, you did just fine. This topic leaves much room for further exploration, at least a few more posts to come. Thanks for visiting and writing today. Joe State tax is one of the little discussed wild cards in this discussion. You are at 9.3% state now. Who can say where you will want to live in retirement? The chance you move to a lower tax state (or no-tax state) shouldn’t be ignored.
The AMT impact deserves a post of its own, but let me offer, TurboTax is great for the “what-ifs” – I set up a return that would put a couple just into the 28% bracket (over $137,050 taxable in 2009). But when I add income, the next $1K is taxes at $325 due to AMT. The adviser suggesting conversions who only looks at marginal rates does a disservice to the client. So lond as when you say you were in the 25% bracket you meant that $10K of conversion increased your federal tax $2500, you did just fine.
This topic leaves much room for further exploration, at least a few more posts to come.
Thanks for visiting and writing today.
Joe

]]> By: kern http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21458 kern Mon, 26 Jul 2010 06:16:35 +0000 http://www.joetaxpayer.com/?p=3038#comment-21458 Joe(s), I am interested in what you said about the protective estimates of state income taxes and the "AMT add back" .. You are saying that with a large conversion, increasing your AGI and subsequently deducting your state income tax, the AMT will go up as the state tax deduction is added back to the total, correct? Also, what do you think about tax diversification, where it is possibly beneficial to have different 'buckets' of retirement funds to dip into, with one unique bucket having Roth money in it? I did a couple Roth conversions back when my marginal tax rate was lower - 25% and state tax of 5%. and paid the tax on it at the time from other funds. I now am in 33% fed & 9.3% state rates and will not have any opportunity to convert again until I am retired I suppose. Great post! Joe(s),

I am interested in what you said about the protective estimates of state income taxes and the “AMT add back” .. You are saying that with a large conversion, increasing your AGI and subsequently deducting your state income tax, the AMT will go up as the state tax deduction is added back to the total, correct?

Also, what do you think about tax diversification, where it is possibly beneficial to have different ‘buckets’ of retirement funds to dip into, with one unique bucket having Roth money in it? I did a couple Roth conversions back when my marginal tax rate was lower – 25% and state tax of 5%. and paid the tax on it at the time from other funds. I now am in 33% fed & 9.3% state rates and will not have any opportunity to convert again until I am retired I suppose.

Great post!

]]> By: Weekly Wisdom: Endless Personal Finance Advice Summer » The Online Investing AI Blog http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21437 Weekly Wisdom: Endless Personal Finance Advice Summer » The Online Investing AI Blog Sun, 25 Jul 2010 08:22:12 +0000 http://www.joetaxpayer.com/?p=3038#comment-21437 [...] To convert to a Roth, or not to convert. Aye. That is the question. Find out what Joe Taxpayer thinks with this post. [...] [...] To convert to a Roth, or not to convert. Aye. That is the question. Find out what Joe Taxpayer thinks with this post. [...]

]]> By: Black Coffee: My Favorite Blogs, Money News, and Opinions #56 (The Spelling Bee Edition) http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21423 Black Coffee: My Favorite Blogs, Money News, and Opinions #56 (The Spelling Bee Edition) Sat, 24 Jul 2010 08:04:17 +0000 http://www.joetaxpayer.com/?p=3038#comment-21423 [...] Joe Taxpayer – Roth Conversion Fail [...] [...] Joe Taxpayer – Roth Conversion Fail [...]

]]> By: When and How To Cancel Your Life Insurance http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21419 When and How To Cancel Your Life Insurance Fri, 23 Jul 2010 10:00:45 +0000 http://www.joetaxpayer.com/?p=3038#comment-21419 [...] Joe Taxpayer  Roth Conversion Fail [...] [...] Joe Taxpayer  Roth Conversion Fail [...]

]]> By: Joe Arsenault http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21413 Joe Arsenault Thu, 22 Jul 2010 04:32:13 +0000 http://www.joetaxpayer.com/?p=3038#comment-21413 Agreed again.. It seems the most common case where a Roth Conversion is a positive option is when the clients do not want RMDs and just want to pass it through their estate to their kids. This of course usually means much larger dollar conversions which requires more of a microscope. Some people seem to think the Roth is a brand new product, like you said, Mania! Agreed again.. It seems the most common case where a Roth Conversion is a positive option is when the clients do not want RMDs and just want to pass it through their estate to their kids. This of course usually means much larger dollar conversions which requires more of a microscope.

Some people seem to think the Roth is a brand new product, like you said, Mania!

]]> By: JOE http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21412 JOE Thu, 22 Jul 2010 04:28:05 +0000 http://www.joetaxpayer.com/?p=3038#comment-21412 Much appreciated. I think Roth Mania has become too common, and while it's tough to pin down a number, I'm guessing fewer than 15% of retirees will find themselves in a higher bracket after retiring. Much appreciated. I think Roth Mania has become too common, and while it’s tough to pin down a number, I’m guessing fewer than 15% of retirees will find themselves in a higher bracket after retiring.

]]> By: Joe Arsenault http://www.joetaxpayer.com/roth-conversion-fail/comment-page-1/#comment-21411 Joe Arsenault Thu, 22 Jul 2010 04:05:07 +0000 http://www.joetaxpayer.com/?p=3038#comment-21411 I agree with you Joe. There are many advantages to a Roth, it is more efficient through your estate, no RMDs for original owners, etc. It is not for everyone though! You said it best, if someone is considering financing the conversion, liquidity is probably an issue, that is most likely not a great scenario. I do not want to spam you and leave a link to any of my resources, but I do a lot of work in this area, I do seminars and work with about 500 advisors that deal with this stuff from a tax standpoint. And with that I say, nice work! :) One separate note, a planner that is advising a large conversion needs to keep in mind protective estimates for state income tax, as this is an AMT add back. Some will get caught sleeping without good advice and planning. Robert Keebler has a great book that goes over this. Thanks for a nice piece. I will check out your related posts as well. It is refreshing to see this topic not get battered by authors who don't understand the subject matter. -Another Joe I agree with you Joe. There are many advantages to a Roth, it is more efficient through your estate, no RMDs for original owners, etc. It is not for everyone though! You said it best, if someone is considering financing the conversion, liquidity is probably an issue, that is most likely not a great scenario. I do not want to spam you and leave a link to any of my resources, but I do a lot of work in this area, I do seminars and work with about 500 advisors that deal with this stuff from a tax standpoint. And with that I say, nice work! :)

One separate note, a planner that is advising a large conversion needs to keep in mind protective estimates for state income tax, as this is an AMT add back. Some will get caught sleeping without good advice and planning. Robert Keebler has a great book that goes over this.

Thanks for a nice piece. I will check out your related posts as well. It is refreshing to see this topic not get battered by authors who don’t understand the subject matter.

-Another Joe

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