I converted the entirety of my traditional IRA moneys into the ROTH when it first became an option. As I recall, I had 4 yrs. to spread out the payment of the taxes foregone when I made my yearly contributions.

When I first mentioned doing it to the our accountant he looked me straight in the eyes and told me I'd be a fool to miss the opportunity. I have had no regrets, and continue to fund my ROTH fully year after year, while also contributing to a Simple IRA at work that also has a small match.

Play around with the numbers, but any time money is allowed to grow tax free it seems like a pretty good deal to me. I like that the money withdrawn will be tax-free, I also like that I don't have begin withdrawing at by a certain age.

This is something I've been considering as well. Does anyone think there is any chance, god forbid the county goes bankrupt, depression, or any other scenario where the IRS decides they can tax Roth withdrawals? That would be double taxation and can't be done no matter what, correct?

I don't think that Roth IRAs will loose their tax free status any time soon. Even if they did, existing Roth IRAs would probably be grandfathered.

A better question may be "Will the U.S. abolish income tax and tax consumption instead?". Consumption taxes are at the heart of the Fair Tax proposals. Here's Huckabee's version:

"The FairTax will replace the Internal Revenue Code with a consumption tax, like the taxes on retail sales forty-five states and the District of Columbia have now. All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities. That means people below the poverty line won't be taxed at all. We'll be taxed on what we decide to buy, not what we happen to earn. We won't be taxed on what we choose to save or the interest those savings earn. The tax will apply only to new goods, so we can reduce our taxes further by buying a used car or computer."

Under the Fair Tax proposals that I've seen, Roth IRAs would be taxed twice. One time through income tax (prior to the Fair Tax) and another time through consumption tax when the money is spent. All wealth would be taxed similarly.

The primary advantage of a 401k over an IRA is that withdrawals may begin at age 55 without penalty (must follow special rules for withdrawal). You must wait until 59 1/2 to withdraw from an IRA without a 10% penalty.

or any other scenario where the IRS decides they can tax Roth withdrawals? That would be double taxation and can't be done no matter what, correct?

Correct...no way it can be taxed twice..

I have been doing a bit of reading and it appears now that the taxes now can no longer be spread over 4 years.

"Correct...no way it can be taxed twice."

That is correct under the current Internal Revenue Code but incorrect under the FairTax. Huckebee's quote in my earlier post is very clear on that point.

"Correct...no way it can be taxed twice."

Oops...sorry. It was late and I kind of missed/dismissed that. I had not seen/heard/ or read much on that b4, but just did some searching. Yes, that could cause a snaffu for many. Wouldn't annuitys be in that catagory too?...or not, as I'm not all that familiar with them and the tax laws.

Here is a quote from the total article linked below. It helped me understand the concept a "Consumer Tax", in a nut shell. It sounds good to me with the exception of the Roth being taxed again...hmmmm.

Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A familys annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction  say, $30,000 for a family of four  would be the familyÂs taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.

Isn't that kind of the way it is now?

Consider this...wealthy folks earn 100mil, and save 100 mil...no tax paid...right? How would that help the economy?

Sue...just boggled at this point

"Consider this...wealthy folks earn 100mil, and save 100 mil...no tax paid...right? How would that help the economy?"

True, if a person doesn't spend any money she/he wouldn't owe any tax regardless of income. However, most people spend a portion of their income. Wealthy people usually spend significantly more dollars than middle or low income people. Mansions, luxury cars, and fine wines purchased at 5 Star restaurants are very pricey.

The FairTax encourages saving and discourages spending. It also increases foreign sales because most fair tax proposals wouldn't tax items sold to people in other countries. Under the current tax system, the price of goods sold to other countries has our corporate income tax embedded in the price.

Also consider that we would have a stronger economy if we saved more, spent less, and sold more goods and services to people in other countries. We would have more money to invest in R&D, new factories, and equipment. The additional investment would reduce the cost of producing goods. Consumption would remain high or increase as a result of the additional foreign sales of lower cost/lower taxed goods.

We have the opposite situation today. As a country we save too little, spend too much, and import more goods and services than we export.

The FairTax encourages saving and discourages spending.
But saving tools such as IRAs (either traditional or Roth), 401K, annuities, and numerous other saving 'plans' encourage saving now...right?

I think there will always be those who 'save' and those who don't save. There will still be those who live from payday to payday, whether it is from necessity or not.

Like I said...it is quite boggling to me right now.

Sue

"But saving tools such as IRAs (either traditional or Roth), 401K, annuities, and numerous other saving 'plans' encourage saving now...right?"

The current maximums for those saving plans are a pittance for wealthy people. I've read that the Eastern European countries that re-formed after the demise of the U.S.S.R. use consumption taxes (no income tax) and their economies are booming.

If we were assured that our current tax system would not change, converting conventional IRAs to Roth IRAs would be a good strategy for many people. Unfortunately, the President and Congress prefer to tinker with the code periodically.

In an uncertain world, a better strategy may be to avoid paying tax for as long as possible. Why? Because the tax code may change. For example, I wouldn't be surprised if the babyboomers pressure Congress to reduce or eliminate income taxes on all 401ks and IRAs at some point in the future. This may be part of a deal to cap or reduce future Social Security payments.

One of the favorite sayings of my former boss, an independent CFP, was "Don't let the tax tail wag the dog." Meaning, of course, that although taxes are a consideration, they should never be the main goal driving your investment portfolio.

That said, today's Jonathan Clements column in the WSJournal specifically addressed the OP's question, so I thought people here might find it interesting reading.

Protecting Your Retirement No Matter Who's President
February 20, 2008; WSJournal, Jonathan Clements, Columnist

..Lately, readers have been writing in, fretting that tax-deductible individual retirement accounts and 401(k) plans will mean huge tax bills in retirement.

But even if tax rates leap, these accounts will likely remain a great investment. My advice: Keep funding that 401(k) -- but, if you're planning a 2007 IRA contribution by the April 15 deadline, plunk it in a Roth account. Here's why.

..Republican front-runner John McCain and Democratic contenders Hillary Clinton and Barack Obama are all proposing middle-class tax relief. But forget the campaign promises and focus on the inevitable: The tax code has to be rewritten -- and the result will probably be higher taxes.

In fact, we're facing a barrage of bad tax news. We need to fix the alternative minimum tax. Many of the Bush tax cuts are set to expire. The absurdly complicated tax code needs to be simplified. We have a sizable budget deficit. We need to pay for Social Security and Medicare for retiring baby boomers.

All this could be damaging for 401(k) plans and tax-deductible IRAs. You might save 25 cents in taxes by stashing $1 in these accounts -- only to give back 33 cents when you withdraw money in retirement. Worried? Don't be.

Suppose you are in the 25% federal income-tax bracket and you earn an extra $5,000 this year, which you want to invest. The stock fund you pick goes on to notch 9% a year, and it doesn't make any taxable distributions.

Would you make more if you held the fund in a regular taxable account, where the fund's appreciation will eventually be taxed at the top 15% long-term capital-gains rate, or in a 401(k), where withdrawals will be taxed as ordinary income?

The surprising answer: Even if your income-tax rate jumps sharply, the 401(k) will likely be the better bet, calculates Allan Roth, a financial planner in Colorado Springs, Colo. Indeed, if you have 15 years to invest, the 401(k) will leave you with more money, as long as your tax bracket doesn't climb above 33%.

If your time horizon is shorter, things are dicier. But even if you have a mere five years to invest, the 401(k) will leave you richer, provided your tax bracket doesn't rise above 28%.

How can the 401(k) be a better investment, given the hefty tax on withdrawals? In the example above, if you fund the 401(k), you can invest the full $5,000. But if you opt for the taxable account, you will first lose 25% of your earnings to taxes, leaving you with just $3,750 to invest.

Given that initial hit, it's no surprise the taxable account rarely wins. Figure in any employer match on your 401(k) contributions, and the 401(k) is pretty much unbeatable.

..As savvy readers will have noticed, we're making a big assumption here -- which is that rising taxes mean rising income-tax rates. Congress, however, may have other plans.

To protect yourself, try a three-pronged strategy. First, stash at least enough in your 401(k) to get the full employer match. Use the account to hold your portfolio's bonds. The interest will be taxed as ordinary income anyway -- and the 401(k) will allow you to defer the bill.

Next, if you're eligible, fund a Roth IRA. The Roth won't give you an initial tax deduction, but all withdrawals should be tax-free.

Finally, if you have additional money to save, buy stock-index funds or tax-managed stock funds in your taxable account. These funds should generate modest annual tax bills, and when you sell, the realized gain will be dunned at the capital-gains rate.

What's the advantage of all this? If income-tax rates rise, that could cut into the value of your 401(k) withdrawals. If capital-gains rates climb, it will hurt your taxable account. And if the income-tax system is ever replaced with a national sales tax, the Roth will lose its luster. In other words, you've spread your tax risk -- and thus you should be in good shape, no matter what Congress does.

Three tips for handling retirement accounts.
Always save enough in your 401(k) to get the full employer match.
Hold bonds in a retirement account, thus deferring taxes on the interest.
If you fear income taxes will rise, favor the Roth over a regular IRA.

"And if the income-tax system is ever replaced with a national sales tax, the Roth will lose its luster.

That's the point I was trying to make.

I also agree that people should continue to invest regardless of the tax uncertainty.

The 4 yr. time period to repay the taxes foregone by conversion to a ROTH IRA was an option in only the first year/two after the ROTH came into existence. That was why I "bit the bullet" and immediately.

I do not believe we will ever see the end of the income tax, personally. A "consumption tax" is too regressive to really gain traction. I, personally, would prefer to see 100% of income taxed, unlike the present system where income tax is gradually phased out as income increases.

Our accountant spelled it out rather succinctly when I queried him about converting to a ROTH: you're young and will be working for many years. Over those years you will amass assets. Better to have a portion of your assets compound TAX FREE for as long as possible.

Should I ever opt to leave my present job I'll likely begin converting some of those retirement savings to my ROTH in a manageable way.

"A "consumption tax" is too regressive to really gain traction."

False. Here's a quote from my earlier post:

"All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities. That means people below the poverty line won't be taxed at all."

Even if we don't change to a consumption tax, I bet the baby boomers will lobby for tax free withdrawals from their conventional 401(k)s and IRAs. I think this has a higher probability than a consumption tax. In any case, tax changes usually favor the taxpayer. I always postpone paying taxes as long as possible because I'll probably benefit from future changes in the tax code.

I don't agree, that's all. Too expensive and too complex to institute, too.

Nobody can predict the future. A national sales tax (aka consumption tax or FairTax) is clearly a possibility. My main point is that when future taxes are uncertain, avoiding paying them for as long as possible can be a good strategy.

Another reason why converting to a Roth IRA may not be wise is that most people are in a lower tax bracket when they retire. For example, $1,000,000 in an IRA supports a $40,000 to $50,000 per year annual withdrawal. If that's the retired couples only income besides Social Security, their tax bill would be about $2,300 in 2007 (a bit more than 5%). That assumes the standard deduction. If the couple still had a mortgage during retirement, they may pay no income tax.

If the couple retires with a $500,000 IRA and no other income beyond Social Security and withdraws $20,000 per year, they pay no income tax assuming they take the standard deduction. So what's the sense of paying tax now for future tax free withdrawals from an IRA when the withdrawals wouldn't be taxed anyway?

Roth IRA conversions make the most sense for people with substantial wealth or who anticipate being in a higher tax bracket when they retire. For everyone else, it may not be a good idea.

As our accountant advised, it's more likely than not that you'll be in a higher tax bracket when you retire than you are now.

I have watched my income increase steadily and have chosen to listen to that advice.

"As our accountant advised, it's more likely than not that you'll be in a higher tax bracket when you retire than you are now."

I agree. You will probably be in your highest tax bracket when you retire but I'm talking about after you retire. Most people will be in a lower income tax bracket after they retire (i.e. less income than their highest income work year).

I don't foresee my income taking a precipitous plunge after I retire, Deerslayer.

We have invested systematically, carefully, and with an eye for the future. You make an interesting point, but not one that I find terribly compelling with respect to my own situation.

If your income will rise after retirement, you are one of the fortunate few. Congrats!!! However, I don't think you should be giving advice to the average reader here based on your personal experience. Most readers don't have several million+ in their retirement accounts.

My income rose after retirement.

I saved about 26% going into my tax-deferred retirement plan, and am paying 36 - 38% going out.

But, all told, I'm paying about 8.5% of gross income as income tax.

In the various Fair Tax and Flat Tax, etc. proposals that I've heard, it seems to me to be largely a way for wealthy people to keep building their investment empire while avoiding any tax on the ongoing income.

Leaving a larger share of the tax burden on the backs of those who are lower income people, who spend a higher proportion of their income.

I note that the middle class is being eroded, with a few becoming rich and many, having lost pension plans in recent years and having little increase in dollars earned, thus actually losing purchasing power due to inflation, losing their relative place in society.

Think South America in earlier years.

I have heard that the recent tax cuts in the U.S. were a large slice for the big guys and peanuts for the little guys.

Our government trumpets some recent tax cuts ... but their change in one system that benefit mostly fairly well to do people increased the level of potential tax-free income from about $28, - 30,000.00 per year to, last year, $46,345.00 for a single taxpayer, regarding one type of investment income.

You'll be noting all of the fuss over U.S. elections ... with attendant high costs.

Who do you figure lays out the money for all of that?

Not the average citizen, I suspect.

Dad used to say that he who pays the piper ... calls the tune.

Good wishes for skillful management of not only your income and regular assets, but of your retirement accounts, as well.

ole joyful

"My income rose after retirement."

If your income adjusted for inflation rose after retirement, you may have lead too frugal of a life when you were younger. Maybe a few more life experiences in your 20s and 30s would have been a better choice. Also keep in mind that many people don't live to be 65.

"In the various Fair Tax and Flat Tax, etc. proposals that I've heard, it seems to me to be largely a way for wealthy people to keep building their investment empire while avoiding any tax on the ongoing income."

Someday more people may realize that investment is what creates jobs. If it wasn't for people like ole joyful, chelone and others who amass small fortunes during their lifetimes, there wouldn't be any money available to corporations for expansion.

In my opinion, what a person spends affects one's lifestyle more than what a person earns. A person that earns $500k and consumes $100k has a similar lifestyle to a person that earns $100k and spends $100k. Why penalize the thrifty person for providing the capital that is needed to create more jobs?

"I have heard that the recent tax cuts in the U.S. were a large slice for the big guys and peanuts for the little guys."

Like Canada, the little guys in the U.S. don't pay income taxes. You can't cut people's taxes if they don't pay any. The bottom half of the taxpayers in the U.S. contribute about 3% of the total income taxes collected. It's one of those "inconvenient truths".

Taxes by AGI

Regarding U.S. political contributions, the maximum that an individual can give a federal candidate is $2,300. Obama currently is leading in total contributions. Most of his contributions are in the $50 to $100 range.

Please don't misinterpret my comments. In past discussions, people have thought that because I explain a particular position, I am somehow a proponent of it. For instance, just because I mention that Obama receives most of his contributions from the little guys doesn't mean I support his candidacy. My primary motivation is the satisfaction that I receive from sharing the truth.

BTW, I too could have a higher annual income in retirement (if I decide to withdraw more than 3% of my retirement funds per year) than my highest income in a working year. However, I also realize that I am in the minority. I sometimes wonder if I should have taken more time off and spent more money when I was younger...less work, more vacations, and more time with my family may have provided a better value. Of course, what's done is done. On the positive side, I now have more than enough money to sustain my current lifestyle during my retirement.

An older friend once told me that nobody on their death bed says "If I had it to do over again, I would spend more time at the office!". That same friend had a final working income of $975k, has about $5 million in retirement funds and draws about 4% or 200k per year. He is in the majority with a retirement income less than his highest working income.

Just some food for thought...everyone needs to find their own way.

I do not have "several million+" in my accounts. I answered the question posed honestly, based on my own experience and my own "take" on what MAY occur in the future.

Your last reply, Deer., with regard to my post was an insulting thing to say to me; esp. when you have NO idea how long I've been saving and investing, let alone the relative wisdom of the choices I've made with my investment dollars over the time I've been investing.

Chemo. I think you should carefully consider moving moneys into a ROTH investment vehicle. It's been a good choice for me.

"Your last reply, Deer., with regard to my post was an insulting thing to say to me; esp. when you have NO idea how long I've been saving and investing, let alone the relative wisdom of the choices I've made with my investment dollars over the time I've been investing."

IMO, you need a thicker skin. If my assumptions were incorrect, please provide your details. As you may guess, I may disagree with the "wisdom" of your previous actions.

I still contend that most people will retire with less annual income than they had during their most productive working years. If this is true, a Roth conversion may not be in their best interest. If you can prove otherwise, I'm all ears. Until then, I plan to "dismiss" your opinions just like you dismissed my intial post.

You were rude and are embarrased that I called you on it.

"You were rude and are embarrased that I called you on it."

The way I see it, you made a huge mistake by paying thousands of dollars needlessly. Now you want to convince others to make the same mistake so that you can justify the "wisdom" of your previous actions. I think that is shameless.

Like I said earlier. I no longer care what you think.

I sure would not worry about a change to something like a consumption tax and allow it to affect my retirement savings plans. That's letting the very improbable tax tail wag the savings dog.

Things like the "Fair Tax" 30% consumption tax would face such a massive uphill fight that they would probably never really see the light of day, and certainly not in anything resembling their current form.

Everyone with a Roth would instantly be against such a plan for the double taxation.

The automakers, the homebuilders, all real estate agents and everyone who owns a home would be against having a 30% sales tax on cars and houses.

People would start to take a hard look at what it would really take to collect such a high sales tax. Evasion attempts are so obviously attractive that compliance costs are huge....can you see an expansion of the IRS coming?

What can I say, inertia alone is against such sea changes and usually the more these nutty schemes are studied the faster the bloom comes off the Rose.

Me, I put ~15% of my gross into a 401k and I max out my Roth contributions. I expect to like the flexibility if adjusting my AGI year to year in retirement.

"Me, I put ~15% of my gross into a 401k and I max out my Roth contributions. I expect to like the flexibility if adjusting my AGI year to year in retirement."

That's an excellent approach but we were discussing the wisdom of a Roth conversion. I'm not going to argue the likelyhood of the tax code changing. It constantly changes.

I agree that the probability of a FairTax is low today. But consider this: six months ago, most people thought that Hillary easily would be the Democrats choice for President. On the Republican side, Giuliani had the nomination all but won. Guess what...things changed! That's what I'm talking about...uncertainty! I can't predict what the tax code will be 10 years from now. IMO, anyone that thinks that they can predict the future is delusional.

I'll say it again: In an uncertain world, deferring taxes for as long as possible may be your best strategy.

You are creating a couple false comparisons though Deerslayer...the degree of uncertainty is not as large as you suggest.

For one, as you state the tax code is always changing. But the kinds of changes we tend to see are a twiddling with the rates. The consumption tax is a kind of change that is exceedingly rare, and with good reason. It is the kind of change that would be incredibly risky and cause major upheaval.

Imagine if such a change in the tax structure were to actually occur. The real value of almost everything, stocks, houses, commodities, an hour's labor, would change overnight. Everything bought and sold would need to suddenly account for this huge transfer cost.

In the time of the government debating such a sea change, people would look long and hard to figure out if they were likely to become winners or losers with the change. Make no mistake, this kind of massive upheaval would make some huge financial winners and some even bigger losers. Watch the losers line up to fight the legislation tooth and claw.

In the end, that is why such a change is unlikely. Too risky for politicians, too much incentive for the potential losers to fight it.

Which brings me to Rudy Giuliani and Hillary Clinton. They were the odds on favorites at one point, but predicting putative nominees is fraught with error. It's like predicting what the exact tax rates will be in 10 years. But predicting the consumption tax becoming a reality is like predicting that the parties will nominate a goat and a lobster.....very unlikely indeed.

"But predicting the consumption tax becoming a reality is like predicting that the parties will nominate a goat and a lobster."

Obviously, I think that the likelihood of some form of a consumption tax is much greater than you do.

You make some good points, but you continue to focus on the probability of a consumption tax only. My key point is that there is uncertainty with the tax code just like there is uncertainty with the world in general.

For example, how many people predicted the tax law changes that created 401(k)s and Roth IRAs? I know that the possibility wasn't even mentioned when I attended business school in the mid 70s. BTW, the law that created 401(k) plans went into effect in 1980. Roth IRAs went into effect in 1998. Based on past history, very significant changes to the tax code are possible...tax code changes are not limited to simply tweaking rates.

Like I wrote earlier, it wouldn't surprise me if 401(k) and traditional IRA withdrawals were taxed differently in the future than they are today. What's more unsettling is that we are probably totally unaware of the next major change in the tax code.

Time will tell... In the meantime, I'm not going to pay any taxes earlier than is absolutely necessary.

"Like I wrote earlier, it wouldn't surprise me if 401(k) and traditional IRA withdrawals were taxed differently in the future than they are today. What's more unsettling is that we are probably totally unaware of the next major change in the tax code. "Deerslayer

I agree with you that we are totally unaware of the next major change in tax code will be or when it will happen.

The first sentence above has me a bit confused. In current tax code, disbursements from 401Ks and traditional IRAs are taxed as ordinary income. Are you anticipating that they will be taxed at a lower rate similar to long term capital gains or a higher rate than an individuals marginal rate? Or are you suggesting that those retirement accounts will no longer have the tax deferred status they currently enjoy?

Personally, I don't think the way the withdrawals are handled will change, but do see the potential Congress to eliminate Roth IRAs and Roth 401ks in the future. I can see the potential for Congress to end the creation of new Roths and not allow any additional contributions to existing Roths at some point in the future.

"If the couple retires with a $500,000 IRA and no other income beyond Social Security and withdraws $20,000 per year, they pay no income tax assuming they take the standard deduction. So what's the sense of paying tax now for future tax free withdrawals from an IRA when the withdrawals wouldn't be taxed anyway?" Deerslayer

This is true if the couple has Social Security income of less than $24,000 between the 2 of them. I dont think its very likely that a couple who have $500,000 in an IRA would have no other investments or income.

On the concept of Roth conversion IMHO whether or not it makes sense depends on how old the owner of the retirement account is, what their individual financial position is and what their tax return looks like. AGI impacts other things on ones tax return such as the amount of taxable Social Security (lets not get into a discussion of Social Security, please) and the amount of medical expenses one can deduct if one itemizes. One never has to take money from a ROTH but one does have to take disbursements from a traditional IRA the year one turns 70.5 years of age. Another clear advantage that a Roth has over a traditional IRA is that one can always withdraw ones contributions from a Roth and pay no taxes or penalties. You cant do that with a traditional IRA.

"The first sentence above has me a bit confused. In If the couple couple is retiring todaycurrent tax code, disbursements from 401Ks and traditional IRAs are taxed as ordinary income. Are you anticipating that they will be taxed at a lower rate similar to long term capital gains or a higher rate than an individuals marginal rate?"

I think that a lower rate is a possibility.

"I dont think its very likely that a couple who have $500,000 in an IRA would have no other investments or income."

Most people transfer their 401(k) balance to an IRA or their new employer's 401(k) when they change jobs. Often, 401(k) balances are transferred to an IRA upon retirement. The end result may be several 401(k)s combined into one or more IRAs when they retire. Most people don't max out their 401(k)s or IRAs. Why do you think that a retired couple with $500k in IRAs would have significant additional investments or income?

Your last paragraph is true assuming that the tax code doesn't change. Like I wrote earlier, a Roth conversion may make sense if the the anticipated final portfolio is several million $ (total investments including $ outside of IRAs). Even if the tax code doesn't change, a Roth conversion may not make sense for a portfolio with an ending value of $500k since the income generated will be too low to be taxed during retirement. Remember that the tax brackets, exemption amount, and standard deduction are all indexed to inflation. Work out the numbers for yourself.

Ive been working as a tax preparer for many years now so I am well aware that many things, but not all things, are indexed for inflation. The threshold where Social Security becomes taxable isnt indexed for inflation and hasnt changed in well over 15 years (personally, I think it needs to change). The 7.5% floor for deductible medical expenses hasn't changed in years and years. The maximum capital loss that you can claim has been limited to $3000 for years, too. And we all know that AMT hasnt been indexed for inflation only short term patches have been saving many taxpayers from paying AMT. Any of those things could be changed. But, historically while Congress has changed many other things in tax code; there are many things that haven't been touched in years and aren't indexed to inflation.

Based on my experience doing tax returns, which isnt a scientific study by any means, most people who have substantial amounts of money in a 401k or IRA have also put money into investments outside their retirement. Yes, there some people put money in a retirement account and never manage to save or invest anything. But in general, it is my experience that the people who are saving for retirement in any substantial amounts are listening to the financial gurus that tell them that they need investments outside of their retirement accounts. Personally, I dont think it is smart financial planning to have your entire life savings in your retirement account.

I disagree with you on the concept of IRA distributions being taxed at a lower rate in the future. I just dont see that happening. I dont see taxes going down in the future. Unfortunately, I expect to see taxes increase or some of the special tax breaks weve enjoyed in recent years being eliminated or not renewed when they expire.

It appears to me that we have different views of what will happen in the future with taxes. I tend to be a pessimist and am the first person to admit that my crystal ball is pretty cloudy when it comes to predicting what will happen in the future.

Whatever your and my expectations are for taxes in the coming years, it will be interesting to see what really happens.

"not all things, are indexed for inflation."

I didn't say that they were. I thought I was very specific on that. Never have I seen more creators of straw men than in this forum. What's with you folks?

"Ive been working as a tax preparer for many years" "most people who have substantial amounts of money in a 401k or IRA have also put money into investments outside their retirement."

Then you also must know that most people are financial illiterates. You haven't done my tax return and never will. A friend of mine did GM's tax returns for many years. I hold my own in discussions with him.

"Personally, I dont think it is smart financial planning to have your entire life savings in your retirement account."

Why not?

"Whatever your and my expectations are for taxes in the coming years, it will be interesting to see what really happens."

We can agree on that.

""Personally, I dont think it is smart financial planning to have your entire life savings in your retirement account."

Why not?""

I'd like to clarify the above response. The only exception that I can think of is an emergency account. However, I don't see anything wrong with deferring taxes as much as possible in other accounts. As I said earlier, most people don't max out their tax deferred accounts...such a waste.

Does this "Fair Tax" proposal suggest that:

a person who makes 1/10th of a million per year and

a person who makes 1/2 of a million per year ...

... should be taxed at the same rate, as far as their income is concerned?

ole joyful

The FairTax doesn't tax income so income is irrelevant. It taxes consumption. It's basically a sales tax.

A person's lifestyle is primarily determined by what one consumes. Why penalize the thrifty person with an income tax when more jobs are created through their savings? We should tax only things that we don't want. I think we want more jobs. Therefore, we should tax consumption not investment because investment creates more jobs.

As a follow-up, here are some examples of things that I agree we should tax:

Alcohol
Tobacco
Firearms

In fact, the U.S. has a bureau dedicated to the above.

ATF

Here are a few more:

Mansions
Yachts
Jewels
Fur Coats
Luxury Cars
(add your own)

I'm not saying that these things are evil. I'm just saying that we may want fewer of these things and more of something else as a society. If you can afford them, you can afford to pay the tax!

That brings us to income. Why would we want less income? More importantly, why would we want less savings and investment when investment is the thing that creates more jobs?

As for as the conversion, my only advice would probably be to make sure know very well what the tax ramifications are. My parents were ignorant and did something with their 401k money and were unprepared for the resulting tax bill. I would probably even consider searching out professional advice in that regard as one person I would not want on my back is the IRS.

As far as a Fair Tax, I have to say that is grossly oversimplifying things to say that investors create more jobs. Companies have products to sell and consumption is the ultimate consumnation of that process.

Irregardless of where the taxes may go, the most important thing of course for most people to remember in regards to retirement is to start saving as much as you can now. There are also many who are at a stage in their life where their effective tax rate is 0% so it is an excellent time to sock some money away into a Roth (if there is anything left over after groceries and gasoline).

"I have to say that is grossly oversimplifying things to say that investors create more jobs. Companies have products to sell and consumption is the ultimate consumnation of that process."

Why do you think that the statement "investment creates jobs" is an oversimpification? Before you can have products to sell, in most cases you must make an investment. I've started several businesses. Believe me, in nearly all cases, you must make an investment before you have anything to sell. Even if you sell a personal service, an investment beforehand is usually required.

I don't like to get into politics but stating that consumption creates jobs is far left nonsense.

I must admit I was quite tired when I typed that and I should have stated that both are needed, investment and consumption. If I purchase a product at Wal-Mart, it has helped to secure jobs along the line from the stocking clerks and check-out clerk to CEO and marketing execs at Wal-Mart alone. The company that produced the product has now earned some profit which it can then hopefully invest in R&D., etc, etc.

I do believe that consumption is a very necessary part of the equation although I believe that responsible consumption would certainly lead to more stability in the economy. Even so, consumption purchased on credit provides interest dollars to corporations which allows them to pay employees as well who can invest or spend as they so choose.

I also must admit that it is quite a new experience for me to say anything that qualifies as far left but so be it, we need consumption and we need investment.

---""Personally, I dont think it is smart financial planning to have your entire life savings in your retirement account."
Why not?""

I'd like to clarify the above response. The only exception that I can think of is an emergency account.---

Assuming you are funding your retirement account appropriately to provide adequate retirement income, why would you put additional savings into retirement accounts? Once there, you can't use them easily and without penalty until you are retirement age. No, tax savings from tax-deferred accounts are not inconsequential, but neither is the freedom that comes with having money available to use how when for what you want.

I am putting money into a combination of 401k and Roth retirement accounts at a rate which will conservatively provide me with adequate retirement income. This is less than the max--(although well over employer-match). Every thing else goes into ordinary ol' non-tax-deferred investment accounts. It's not really "emergency" money--- i also have 6-month living expense emergency funds in my bank account. But I am in my 30s. Why would I put any money above and beyond what I will need for retirement somewhere that I can't easily reach it for the next 15-20 years?

Maybe I'll want to go to grad school and want to use it for tuition.

Maybe I'll get married and want to put my husband through school. Or my husband's kids.

Maybe I'll want to buy a bigger more expensive house and want to use it for down payment.

Or a second vacation and/or investment home.

I might want to take a year off work and travel.

I might want to take a year off work and be a mommy to a new baby.

I might not *want* to take a year off work but be forced to when I'm fired from my current job and it takes me a year to find a new one.

I might want start-up money for my own business.

I might have a sudden desire for one of those convertible Mercedes two-seaters (is it the SL i think)....

I might I might I might. Freedom (and security) is "why not?" (which are the same reasons btw that I'm saving it in the first place rather than simply spending everything above and beyond what I've decided I need to save for retirement)

Quirck, my original example was a retired couple collecting Social Security. They also have a $500k IRA. A person wrote that they didn't think its very likely that a couple who have $500,000 in an IRA would have no other investments or income.

Your "I mights" may fit your particular situation but they have little relevance to a retired couple with a $500k IRA.

Tishtoshnm, investment creates businesses and businesses create jobs. A successful business requires: competent management, trained workers (to fill the jobs), and customers. The customers consume the products but they do not create jobs. Competent management and trained workers don't create jobs either. However, all three enable the business to survive.

Quirk listed many good reasons why a married couple might have some money invested outside their retirement accounts. From what Ive seen, those are pretty common reasons for anyone to have money outside of a retirement account. What happens to those investment accounts when the couple retires? Does their desire to travel, buy a new car or pay for a childs (yes there are more and more retirees that have college age children) or grandchilds education go away when they retire? Does the investment money magically disappear the day the couple retires? The couple cant contribute that money to a retirement account because they no longer have earned income. They could live on their investment accounts until they are gone or they reach 70 ½ and have to take distributions from 401ks and traditional IRAs. I never said it wasnt possible that a couple could be retired and living solely on Social Security and 401k or IRA money. I dont believe that situation is typical.

Also, everything Ive read leads me to believe that taxes will go up if either Hillary or Obama are elected. Have you read something to the contrary?

sigh...

"Your "I mights" may fit your particular situation but they have little relevance to a retired couple with a $500k IRA." --and your retired couple with a $500k IRA has what relevance to the OP and her question?

jlhug said...

"But IN GENERAL (caps mine, not jlhug's), it is my experience that the people who are saving for retirement in any substantial amounts are listening to the financial gurus that tell them that they need investments outside of their retirement accounts. Personally, I dont think it is smart financial planning to have your entire life savings in your retirement account."

you asked "why not?"

I answered the question you asked.

IN GENERAL, having your entire life savings in your retirement account limits your freedom to do with it what you please when you please.

You are correct, I am not your hypothetical retired couple with $500K in an IRA-- then again, neither is chemocurl, who is the one who **originally** asked the question about *her* personal situation. Why do you get to take her question about her personal situation, turn it into a general discussion about what you think might be best for an "average" person using a specific hypothetical that you chose to support the view you're trying to make, then snap at me for discussing other possible (general or specific) situations? We are only allowed to talk about the specific situation that supports your point?

If we are going to evaluate a specific person or couple's financial choices, then we ought to be looking at the OP's, who asked the question, not your hypothetical couple. If we are having a general discussion about how to plan your investments for for your future, then my (and anyone else's) situation is as relevant as your hypthetical retired couple's.

"and your retired couple with a $500k IRA has what relevance to the OP and her question?"

My main point before this discussion got dragged into irrelevant minutia is that an IRA conversion to a Roth IRA does not make sense for many people. That is what the OP is considering. The OP is 57 years old. She has 2 1/2 years before withdrawals are not penalized. I think that my example is more relevant to the OP's situation than a 30 something example or most of the other things that have been said.

My example illustrated that a retired couple with a $500k IRA would have very little taxable income. This assumes no part time jobs or other investments. If you want to consider income from other sources, we can reduce the size of the IRA and my point still stands. If the OP's situation is much different, I think it would make more sense for her to comment than the folks that have been.

"IN GENERAL, having your entire life savings in your retirement account limits your freedom to do with it what you please when you please."

...not if you are 59 1/2 years old or older. That's 2 1/2 years for the OP.

"Does the investment money magically disappear the day the couple retires?"

Most people spend their taxable investments first. Usually, it's good tax strategy. Also, the list of "I mights" usually shrinks significantly as one nears retirement. If the individual was a good money manager, he/she won't have much in non-tax-deferred investments at retirement. Either the funds were spent on "I mights" or they were tax deferred. The primary exception is people with significant wealth.

If you can present an example that better reflects the OP's situation, please do it. IMO, your 30 something examples are way off target.

More specifically, if you can explain why a Roth conversion makes sense for a 57 year old, I'm all ears. That is what the OP wants to know. If you can't explain it, please stop nitpicking.

BTW, we've already agreed that if an individual's tax rate will be significantly higher after retirement, a conversion may make sense. IMO, most people don't experience a significant increase in income at retirement.