Obama budget to go after IRAs

[Libertarian666]

The only thing surprising about this is that there apparently still are people who don't realize that the government cannot be trusted to keep their promises.

[rocketdog]

Glad to hear King Obama has decreed what a "reasonable" level of retirement savings is.

My thoughts exactly.  For someone with a serious medical condition or in need of round-the-clock nursing care, $205K isn't going to go as far as you'd hoped.  Just another attempt to get everyone dependent on the nanny state. 

[rocketdog]

I can't believe he's really this stupid. Has he ever heard of the AARP?? They're going to hammer him on this. What an idiotic and politically tonedeaf move. It's like he's decided to destroy his party's credibility by putting his weight behind all the worst and least popular ideas the Democratic party ever came up with the moment he was re-elected.

It'll be like anything else the gov't does: first there will be restrictions only on certain types of investments that can earn those types of returns to begin with (probably what Romney did), then it will spread like a fungus until the gov't is dictating which funds you can buy, and how much of each you can buy. 

I have to say, I was incredulous toward all the people who suggested that Obama was going to change and become Mr. Super Socialist if he was re-elected, but I have to admit I was wrong.

I don't think he changed into a Socialist, I think he's always been.  But a lame duck President can afford to float ideas like this out there.  All we can do is hope Congress has enough sense in them to do the right thing (did I really just type that?) 

[rocketdog]

For what it's worth, I'm all in favor of the other annoying IRA rules going away too. In fact, I'm strongly in favor of the whole unnecessarily-complicated IRA vehicle itself becoming obsolete by eliminating capital gains taxes altogether. They raise a paltry amount of revenue and introduce a great deal of complexity into the tax code.

Boy, does it ever!  My wife just did our taxes, and ours are really not that complicated.  But she did exercise some stock options last year from her previous company, and she had a hell of a time figuring things out even with TurboTax.  And she's a CPA and has an MBA!  She even said to me, "How in the world does the average person manage to figure any of this out?!" 

[rocketdog]

One reason I never did a Roth conversion is I feel when I access those funds they will have come up with a way to tax me on them in some other way.

I have never done a Roth conversion either but I have opened  Individual Roth accounts for both me and my wife and have been funding them to the max for the past few years.
ill all play out in the lung run so we are just hedging our bets.

Same here.  We had a Financial Advisor a few years ago who advised us not to convert any IRA amounts to a Roth, even though the gov't was promoting the lifting of the income limits and spreading the tax over 2 years to do so.  He said if you do the math it's actually a bad deal for most people (there are a few exceptions).  He had an article published about the topic. 

Reason being, you're paying tax now while you're in a higher tax bracket, but you'll be withdrawing the funds later while you're (probably) in a lower tax bracket.  Plus, you have to pay the tax now, so that's even more money that's no longer invested and working for you. 

[moda0306]

One reason I never did a Roth conversion is I feel when I access those funds they will have come up with a way to tax me on them in some other way.

I have never done a Roth conversion either but I have opened  Individual Roth accounts for both me and my wife and have been funding them to the max for the past few years.
ill all play out in the lung run so we are just hedging our bets.

Same here.  We had a Financial Advisor a few years ago who advised us not to convert any IRA amounts to a Roth, even though the gov't was promoting the lifting of the income limits and spreading the tax over 2 years to do so.  He said if you do the math it's actually a bad deal for most people (there are a few exceptions).  He had an article published about the topic. 

Reason being, you're paying tax now while you're in a higher tax bracket, but you'll be withdrawing the funds later while you're (probably) in a lower tax bracket.  Plus, you have to pay the tax now, so that's even more money that's no longer invested and working for you. 

It definitely is risky for the taxpayer who is seeing himself near higher tax brackets if he recognizes taxable income, and if he's still in his working years and seeing about 1/3 of his money going towards taxes, but here's where I would disagree with this advisor:

- For people in the tip-top tax bracket, over-hedging that's happened in the past by going with a pre-tax heavy allocation can be mitigated by modest to sizable Roth conversions.

- The whole "there's less money working for you" line is half-true.  Any Traditional IRA has an implied tax liability within it... but the investment advisor still gets paid on the gross... not net... asset amount.  Not implying anything.  Just full disclosure that it's in their best interests to keep traditional IRA's from turning into Roths.

- Because of how Social Security works and is taxed, marginal brackets aren't necessarily lower in retirement.  I keep my parents in the 10% federal bracket by doing appropriate sized Roth conversions (their very low-cost lifestyle helps, too).  If I were to take another $10,000 in income from their Traditional IRA they'd watch about $4,000 of that go to paying federal and state income tax.'

- If people have too much in pre-tax IRA accounts and nothing anywhere else, an event that requires large cash inflows could blast people into much higher tax brackets than they'd otherwise be in if they'd have done modest, consistent Roth contributions or conversions. 

- If people have funds in outside taxable accounts, paying taxes with those funds to move the money to a Roth will effectively increase the size of your tax-shelter... simply shfting a taxable asset to pay off a tax-deferred liability.

It's really all about balance.  Don't convert too fast.  Don't over-weigh one vs the other.  Pay attention to EFFECTIVE marginal tax rates (not just stated tax brackets).  Have plenty of liqudity you can access that's not going to blast you into new tax brackets.

[rocketdog]

- The whole "there's less money working for you" line is half-true.  Any Traditional IRA has an implied tax liability within it... but the investment advisor still gets paid on the gross... not net... asset amount.  Not implying anything.  Just full disclosure that it's in their best interests to keep traditional IRA's from turning into Roths.

The advisor I'm referring to was a NAPFA member and a fiduciary.  So no conflict of interest there. 

[moda0306]

rocketdog,

I think those fees are based on assets managed... though I guess I'm not sure on that.

Either way, I probably shouldn't have even mentioned that since I didn't want to make implications.  However, I think it really depends on where peoples' assets are, and the people that have been "doing this wrong" have been much more on the side of wanting to over-use the traditional IRA and not do conversions. I think most people calling for conversions are realizing that it applies to people that have far, far over-hedged into pre-tax accounts over the years.