Gyroscopic Investing

From http://www.scribd.com/doc/118551686/Mat-12564:

SEC. 1002. AMOUNTS IN APPLICABLE RETIREMENT PLANS
MAY BE TRANSFERRED TO DESIGNATED
ROTH ACCOUNTS WITHOUT DISTRIBUTION.
(a) IN GENERAL
.—Section 402A(c)(4) is amended by
adding at the end the following:
‘‘(E) SPECIAL RULE FOR CERTAIN TRANSFERS
.—In the case of an applicable retirement
plan which includes a qualified Roth contribu-
tion program—

156
MAT12564 S.L.C.
‘‘(i) the plan may allow an individual
to elect to have the plan transfer any
amount not otherwise distributable under
the plan to a designated Roth account
maintained for the benefit of the indi-
vidual,
‘‘(ii) such transfer shall be treated as
a distribution to which this paragraph ap-
plies which was contributed in a qualified
rollover contribution (within the meaning
of section 408A(e)) to such account, and
‘‘(iii) the plan shall not be treated as
violating the provisions of section
401(k)(2)(B)(i), 403(b)(7)(A)(i),
403(b)(11), or 457(d)(1)(A), or of section
8433 of title 5, United States Code, solely
by reason of such transfer.’’.

(b) EFFECTIVE DATE
.—The amendment made by
this section shall apply to transfers after December 31,
2012, in taxable years ending after such date.

Does this mean that you can roll your entire IRA into a Roth? I thought that was already a thing you could do…

From the news reports I've read, the "changes" to the Roth Conversion were included to provide increased revenue to the government, not a tax-cut. Thus, whatever the "changes" are should be interpreted as "bad" for people in the same a tax increase is "bad" for an individual.

However, I have no idea what these "changes" are or how they will be bad. Perhaps it increases flexibility in conversions and thus the government plans to use this change to increase revenue by allowing more people to do conversions now?

I'm confused too. The whole thing looks voluntary, like they're encouraging people to roll over tax-deferred accounts into Roths so they can harvest the income tax revenue from the conversion now (which is so gimmicky that it makes perfect sense for Congress to do), but I'm having a hard time seeing how anything I posted up there from the bill differs from what's already possible.

This stuff is a lot more complicated than it needs to be.

My fear for a long time has been that the government would figure out a way to tax Roth income in the future - perhaps through a VAT. My fear is worsening because now the government is encouraging people to do Roth conversions. That means more money in Roths and more lucrative pot to steal from in the future.

If Roths were not popular or common, then the government would be less likely to try to tax them in the future.

Then again, if they are not popular, there will be less resistance to taxing them in the future, when the government claims only the wealthy have been using them to dodge their fair share.

So perhaps it might be good to have everyone in Roths so there's more resistance to future taxation.

TripleB wrote: My fear for a long time has been that the government would figure out a way to tax Roth income in the future - perhaps through a VAT. My fear is worsening because now the government is encouraging people to do Roth conversions. That means more money in Roths and more lucrative pot to steal from in the future.

If Roths were not popular or common, then the government would be less likely to try to tax them in the future.

Then again, if they are not popular, there will be less resistance to taxing them in the future, when the government claims only the wealthy have been using them to dodge their fair share.

So perhaps it might be good to have everyone in Roths so there's more resistance to future taxation.

I would think there would be a lot of people having Roth versions of something in the future and that you'd have a lot of angry people if you were to tax it. It might not be politically popular to do but I agree there is a possibility it could happen.

No disrespect to our discussion board but Fatwallet Finance probably has 10,000x the volume of posters/readers so I'm tracking the discussion they are having here:

http://www.fatwallet.com/forums/finance/1248320/

Well, it looks like the idiots in the House might not pass the bill anyway, so this all might be moot. 

So apparently, this new Roth provision is simply this:

Added flexibility for an individual to perform a Roth Conversion, now allowing an in-service Conversion between a Traditional 401k and a Roth 401k. Nothing has been done to negatively impact anyone or reduce their ability to do what they could do before this provision.

In essence, the government needed to figure out where to "generate" $12 Billion from in the tax bill, so they "estimated" that by adding this new provision that allows more flexibility in Roth Conversions, they will generate an additional $12 B in tax revenue over the next 10 years.

People are calling bullshit because that $12 B number is totally made up and is only going to reduce future tax revenue from those retirement accounts. Here's a CNBC article today that explains:

http://www.cnbc.com/id/100354307

TripleB,

I don't know if that 12 billion is a 1-year or 10-year figure, but if 100 million people have 401k plans (complete guess) it would take an average conversion tax of $120 per person to get to 12 billion in revenue.  At an average rate of 25%, that's a $480 conversion per person

Roth conversions are really in nowadays, especially cuz people have been over-doing pretax contributions for so long. $12 billion hardly seems asinine to me.

Moda,

To reiterate: It's Traditional 401k to Roth 401k conversion. Not Traditional 401k to Roth IRA Conversion.

Roth 401ks are pretty crappy compared to Roth IRAs. There's additional restrictions on the money in the Roth 401k that don't exist in the Roth IRA.

Additionally, the big reason why Roth IRA conversions have been "in" recently is because:

1) There was a recently expired rule that allowed an individual to do a conversion immediately and pay the taxes split over the following two tax years. That's gone.

2) People were doing Non-Deductible IRA contributions and converting them to Roths, Tax-Free (assuming they didn't have other Traditional IRA money that would change the cost-basis of the Non-Deductible IRA).

3) The stock market was hammered 40% in recent years so one could take advantage of a down market to do a conversion. The market has since recovered.

With respect to a Traditional 401k to Roth 401k conversion, it's a horrible idea generally because the person is in their prime earning years.

Additionally, not all employers offer Roth 401k options. The conversion only works if the employer's plan has it.

Finally, a significant portion of the country has pulled money out of 401ks in the last 2 years, in spite of having to pay significant taxes and penalties. Is it likely people are going to pay a 30%+ tax (25% marginal federal and 5% state) in order to keep money in a 401k (and just switch to a different type)?

I don't think we will get anywhere near $12B in revenue from this provision. However, on the plus side for the politicians, 10 years from now we'll have forgotten about this plan because they'll be proposing some other anti-constitutional legislation (to "protect" the internet, or violate the 2nd amendment, or the 4th amendment, or whatever), and no one will remember how silly of an idea this was.