Retirement Planning

**pyriel** · 09-08-2005, 07:22 AM

Spaf wrote:

We can also have a Roth, where gradually we could transfer funds from the Traditional to the Roth.

Yes, this is stretching my brain. Why would you want to do this?

I was challenged by Rolo'squestion and decided to put it in an excel worksheet so that we can all see if it makes sense to do this or not. My scenario is based on someone retiring at 60 years old with 500k in TSP. On one column, individual transferred the money to traditional IRA. The other column, individual transferred his TSP to Traditional IRA then to ROTH. I based the Tax bracket to 36% which is pretty high but not the highest.

Money left in Traditional IRA grew to about $3,363,749.97 at age 80. If individual decides to close the account, he/she will get $2,152,799.98 after the 36 taxes.

Money transferred to Traditional IRA then to ROTH grew to $1,891,069.76 PLUS $290,811.36 that is left with traditional IRA (36% tax was taken out). The premise here is that individual was taking 10% per year, paying taxes on it, then moving them to ROTH.

COUNCLUSION: transfering the money from "Traditional IRA then to ROTH"only made just as much as "leaving the money in a Traditional IRA." This means that ROLO isright about stretching his brain on why would anyone do this in the first place.

**Mike** · 09-08-2005, 08:53 AM

Doesn't this depend on what the tax rates are doing? I.e. if they are stable for a long period of time, it makes no difference which approach you take, but if rates are rising over time, it would make more sense to take more out early on and shield it... right?

**mlk_man** · 09-08-2005, 11:28 AM

THanks Pyriel, stop working so hard will ya!!

I think a Roth account makes the most sense if you start an IRA before you actually retire. Just keep putting the yearly max. in it and put the rest in a tax-exempt IRA.

So currently I have this going on:

TSP- 5% with govt. matching

Roth- put $4000 in this year. Goes up to $5000 next year.

Traditional IRA- all other "free" monies

In case of emergency I would set up an electonic transfer with ST to deposit money directly into my checking account using money that I deposited into my Roth. This money would be tax and penalty free. Depending on the day of the week you make the request, this should only take about a week. I believe they distribute funds on Wed. so if you fax in a form on Mon. or Tues., you should have your money in a couple days.

Also don't forget that you have until April 15th of the next year to fund your Roth for the current year. Meaning that you have until April 15th, 2006 to come up with $4000 for 2005.

M_M

**pyriel** · 09-09-2005, 04:31 AM

mlk_man wrote:

I think a Roth account makes the most sense if you start an IRA before you actually retire. Just keep putting the yearly max. in it and put the rest in a tax-exempt IRA.

I did a cost analysis pertaining to your comment. Here is the scenario. Elvis is 25 years old male that is currently in the 30% bracket. For him to actually contribute 2k into ROTH, it means that he had paid $600 tax for them based on his 30% tax bracket. El visis also 25 years old and he started putting in 2k every year to his Traditional IRA.I set the return to 8% per year. At age 60, both have accumulated, $404,140.64. ROTH ended up paying a total amount of $21,600 upfront (600 per year).Elvis then decided to do a one time withdrawal with his ROTH($404,140.64 - $21,600 = $382, 540.64). El vis also decided to do a one time withdrawal with his Traditional IRA ($404,140.64 -30% = $282,898.45).

***I didn't factor inwhat 2k would do to Elvis' taxes yearly since his W2 would have shown 2k less due to hiscontribution to theTraditional IRA.

**Rolo** · 09-09-2005, 01:34 PM

mlk_man wrote:

Roth- put $4000 in this year. Goes up to $5000 next year.

Not until 2008....unless yer old.

[line]

I'm still at a loss as to why you would want to convert from Traditional to a Roth; why pay all those taxes up-front rather than over time?

Note that this is different than deciding which type to contribute,so "tax-free growth" axioms not necessarily apply....or do they? Tax-free growth henceforth, but at the expense of immediately paying taxes on all prior growth.

Also..if you are leaving your retirement balance to an heir...rather than enabling them to continually defer those taxes, you paid them up-front by converting to a Roth.

**mlk_man** · 09-09-2005, 03:32 PM

Rolo wrote:

I'm still at a loss as to why you would want to convert from Traditional to a Roth; why pay all those taxes up-front rather than over time?

Note that this is different than deciding which type to contribute,so "tax-free growth" axioms not necessarily apply....or do they? Tax-free growth henceforth, but at the expense of immediately paying taxes on all prior growth.

Also..if you are leaving your retirement balance to an heir...rather than enabling them to continually defer those taxes, you paid them up-front by converting to a Roth.

I think it's probably all about the age that you decide to either or.

But just a couple points, once you start taking distributions from a Traditional IRA, it is considered "taxable income". This will most likely effect your Social Security and how it is taxed. Distributions from a Roth are not considered "taxable income".

You also have mandatory distribution rules when you turn 70 with a traditional buy not with a Roth.

As far as heirs, with the Roth your beneficiaries never pay taxes on it. Why bother them with having to pay taxes on a traditional? Of course both will be subject to estate taxes.

I've already done one conversion for a friend. Keep in mind she only had about $10000 in the account. Everything changes if you have a few hundred grand in it and make a decent return on the money that you would have paid in taxes "upfront". So I think it's an age and a money issue as to which one is best. :^

If one is just starting out and doesn't have a lot of capital built up yet, I'd say a Roth is right for you. If you have a lot of capital and are already at the top of the tax bracket, I'd say stick with the traditional.

M_M

**mlk_man** · 09-09-2005, 03:34 PM

Rolo wrote:

mlk_man wrote:

Roth- put $4000 in this year. Goes up to $5000 next year.

Not until 2008....unless yer old.

[line]

Oops, you are correct sir!

**Rolo** · 09-09-2005, 07:31 PM

hehe...I know...I was thinking, putting together my financial plan for '06 last week, that the limits went up to $5K. I was quite disappointed when I double-checked.

Wonder why we thought that? (Impatient, hehe)

I am trying to decide if I want to take some of that $15K TSP chunk and divert it to my Scottrade account for active trading and better funds. hrmmmmmm.

Check me here: for that to be a better move, I would have to outperform my TSP allocation returns PLUS income tax savings.

i.e. ifmy TSP yields 12% and Ipay 25%income tax rate, then I would have to return more than 37% in my Scottrade endeavours to get ahead. Correct? (That just doesn't seem quite right, but I cannot figure out why.)

**Spaf** · 09-09-2005, 07:47 PM

Uh Oh! Here goes the PT Cruiser!

o

**Rolo** · 09-09-2005, 08:10 PM

Spaf wrote:

Uh Oh! Here goes the PT Cruiser!

o

hahahaa...yeah, now I have TWO of them to modify...so I need to get my Scottrade goin' again!

heh, I'll use horsepower and % interchangably..so if I add 20 HP to onePT, that counts as a 20% gain on my Scottrade account.