Comments on: Why We Converted Our Traditional IRA To A Roth IRA http://www.moneyhelpforchristians.com/roth-ira-conversion-2010/ Frugal, Simple, Debt-Free Living, and Generous Giving Sat, 11 Feb 2012 21:06:49 +0000 hourly 1 http://wordpress.org/?v= By: JoeB http://www.moneyhelpforchristians.com/roth-ira-conversion-2010/comment-page-1/#comment-11364 JoeB Wed, 08 Dec 2010 21:57:42 +0000 http://www.moneyhelpforchristians.com/roth-ira-conversion-2010-why-we-converted-our-traditional-ira-to-a-roth-ira/#comment-11364 I definitely converted to a Roth this year and last year and the year before. I convert up to where the marginal federal tax rate changes from 15% to 25% and I have been doing this for several years and will be completely into Roths when I start collecting social security. One thing folks miss about regular IRAs is the double taxation of social security if you cash in regular IRA's while collecting social security. The government will make sure you do so if you live to be 70 and still have regular IRA's. There is a calculation that shows how much of your social security is subject to federal income tax. It is based upon both your social security income and your taxable income including work, interest, regular IRA's, 401K, 457, 403b and the like. The point at which the taxable amount of social security starts kicking in is $32,000 a year. This could change, but I expect if it does, it won't be in the right direction and will result in even more taxes on social security. What happens is that about 50% of my social security will be taxable when I start collecting at 66, but if I cash in regular IRA's as well at that time, the amount ratchets up to 85% very quickly because of other income I receive. This results in an effective rate of 20 to 25% instead of the 15% I have been paying over the last several years. The calculations are complex and based upon each individual situation, so no specific scenario works for everybody. If you don't have any income except social security, it probably won't be a problem to cash in regular IRA's as you need them. If you have other income, it can make a significant difference in the amount of tax you pay, particularly if you need to cash in a large amount from your regular IRA's for an unexpected expense. Converting to a Roth over a period of years protects against this since withdrawing from a Roth has no tax consequences once you reach 59 1/2 and have had it for 5 years. I recommend every person investigate this, since it is not well covered in the media and is really a hidden tax on retired people with tax deferred retirement accounts. The Roth conversion is one of the only means for retirement tax planning that can be used before one retires. The idea of leaving a tax deferred account alone as long as possible is not always the best idea for every individual. and can in fact be a very expensive decision tax wise if you need a large amount in a single year, perhaps for medical expenses. I definitely converted to a Roth this year and last year and the year before. I convert up to where the marginal federal tax rate changes from 15% to 25% and I have been doing this for several years and will be completely into Roths when I start collecting social security.

One thing folks miss about regular IRAs is the double taxation of social security if you cash in regular IRA’s while collecting social security. The government will make sure you do so if you live to be 70 and still have regular IRA’s.

There is a calculation that shows how much of your social security is subject to federal income tax. It is based upon both your social security income and your taxable income including work, interest, regular IRA’s, 401K, 457, 403b and the like. The point at which the taxable amount of social security starts kicking in is $32,000 a year. This could change, but I expect if it does, it won’t be in the right direction and will result in even more taxes on social security. What happens is that about 50% of my social security will be taxable when I start collecting at 66, but if I cash in regular IRA’s as well at that time, the amount ratchets up to 85% very quickly because of other income I receive. This results in an effective rate of 20 to 25% instead of the 15% I have been paying over the last several years. The calculations are complex and based upon each individual situation, so no specific scenario works for everybody. If you don’t have any income except social security, it probably won’t be a problem to cash in regular IRA’s as you need them. If you have other income, it can make a significant difference in the amount of tax you pay, particularly if you need to cash in a large amount from your regular IRA’s for an unexpected expense. Converting to a Roth over a period of years protects against this since withdrawing from a Roth has no tax consequences once you reach 59 1/2 and have had it for 5 years.

I recommend every person investigate this, since it is not well covered in the media and is really a hidden tax on retired people with tax deferred retirement accounts. The Roth conversion is one of the only means for retirement tax planning that can be used before one retires. The idea of leaving a tax deferred account alone as long as possible is not always the best idea for every individual. and can in fact be a very expensive decision tax wise if you need a large amount in a single year, perhaps for medical expenses.

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