<p>Absolutely one can have more than one IRA as long as you don’t contribute more than the max to all combined in any one year. And if you’re self employed, you can have things other than traditional or Roth IRA’s. You can have a Simple, Keogh or SEP all of which have higher contribution limits assuming you have enough income.</p>
<p>So it sounds like the least complicated thing, as far as figuring out the basis, if one had a pre-tax IRA, is just to open up a new account and make it a non-deductible IRA, contributing for this year. Then convert to a Roth, and you don’t have any basis to pay taxes on. Am I getting that correct?</p>
<p>No. If you open a new one and contribute, then convert, the IRS still taxes a percentage based on the basis of ALL existing IRA’s.</p>
<p>Shoot, we have a little IRA, that I have no idea if it is pre or post tax. Our friend takes his commission out of it (another stupid thing we did). But it will probably only be worth $600 at the end of the year anyways. I just like to avoid complication and I don’t even remotely remember whether it was deductible or non-deductible. Guess we’ll have to figure that one out.</p>
<p>'Get out your tin foil hats. I’m starting to think that 401k funds over a certain level - Obama floated 3 million, will start getting either seized (doubtful) or taxed (more likely).</p>
<p>I think the real question is what to do with your money outside retirement to lower your tax burden."</p>
<p>I guess we’d better get to it, and make one of those tin foil hats. But wasn’t the 3 million proposal just a limit to how much one could contribute and deduct taxes, not additional taxes? </p>
<p>I don’t know that there’s any way to lower your tax burden anymore, without doing something tricky. Everything we have is in either retirement funds or real estate.</p>
<p>I never had a Roth IRA when I was working, but had a large traditional IRA that grew from several 401Ks that I rolled into it when I changed employers. </p>
<p>I stopped working 6 years ago, and have had very little income since that time. Every year I have converted some of my traditional IRA into Roth IRA, and will continue to do so every year. (In 2010 we converted and split the taxable income between 2011 and 2012) I am careful to only convert enough to generate a very small amount of taxable income so I have been paying very little if any tax on the converted amounts. An additional benefit has been, in some years I actually needed the income to take advantage of a tax credit. </p>
<p>Over the years I have become a little skeptical about the benefits of a traditional IRA. In many cases you are taking long term capital gains and dividends that would have been taxed at very low rates, and converting that income into ordinary income taxed at higher rates when you withdraw it from your traditional IRA. Hard to argue against a Roth, where the withdrawals are (supposed to be) tax free.</p>
<p>My DH converted our IRAs to Roths during that window of opportunity for people like us who otherwise would not qualify for a Roth, 2 years ago. It gave us 2 years (2011 and 2012 tax years) to pay the taxes due. It was a SERIOUS OUCH! Had to pay a HUGE tax bill for 2011 and then quarterly taxes for 2012, while STILL having to write a HUGE check for the 2012 taxes. My DH insists it was the right thing to do so when we cash them out down the road they will be tax free. I am stil not completely convinced, but its a non-issue since its done.</p>
<p>^^Very smart move, NJres.</p>
<p>It does make you think, why would someone invest in a traditional IRA during a time when they aren’t making much money, and get barely any tax break----then have to pay the higher taxes later on, when their income could be higher? I hope they don’t get rid of the Roth, that is a huge benefit. I convinced my older son to open a Roth, by the end of the year he should have over 16K in it. Not huge, but pretty good for 22. If he withdraws from it, I will be very upset.</p>
<p>I have to agree with your husband, jym. If that can be the last thing you ever cash out…hopefully it will be increasing in value, and all of that will be tax free. And if you don’t use it before you die, what a great tax free gift for the kids.</p>
<p>We did the same exact thing, and it was really sickening because we didn’t have the money to pay all those taxes. Having to borrow money and pay interest for taxes is just so awful, and probably another stupid move. But I KNOW it will be worth it. Luckily interest rates are really low.</p>
<p>We should get rid of these roths and other tax advantaged retirement plans. They are gifts to the financial industry and to those that participate. These programs cost the country 100 billion a year or something like that. </p>
<p>That 100 billion has to come from somewhere. The savings rate in this country is running about 2 percent a year so these programs aren’t working that great anyway.</p>
<p>My taxes would go up if these programs were abolished. That is ok. We could cut income tax rates instead of keeping these programs. There would be less bookkeeping issues. Tax preparation would be easier. People wouldn’t be spending their time looking for tax avoidance opportunities. Many of these programs are questionable anyway because cap gains are taxed lower than ordinary income. </p>
<p>When you convert to a Roth and have to pay the tax upfront you are working with less money going forward. Sometimes that is ok and sometimes it isn’t. If you are in a low tax bracket like NJres it makes sense to convert. If your taxes are going to remain high in retirement than it could make sense to convert. </p>
<p>But we should really get rid of these programs.</p>
<p>Our S has a ROTH and maximizes contributions to his 401K, with employer match for part of it. He also has the nest egg we gave him when he turned 18. He graduated with no debt and is still debt-free. He has a good full time job with scheduled promotions and raises as well as great benefits. We are relieved he’s in a good place right now. Now, to finish launching D…</p>
<p>“We should get rid of these roths and other tax advantaged retirement plans. They are gifts to the financial industry and to those that participate. These programs cost the country 100 billion a year or something like that.”</p>
<p>Well, maybe that is true. I’m sure that the point was to encourage people to save, but now the people that are taking advantage of them are those who would have saved anyways. But as long as they are available, it seems prudent to utilize them, just like any other tax advantaged program.</p>
<p>Though I’m sure in some cases where people are converting traditional IRA’s to Roths, and paying taxes at a high rate up front, like jym, the government is benefiting. They are getting many $$ that they need from taxes right now, though in the long run that’s probably not the smartest move.</p>
<p>The other factor we looked at was the combo of current income, tax rates, and taxable amounts versus retirement income, tax rates then, and taxable amounts then and how many years in-between. </p>
<p>What I mean is if our tax rates are high now because of current income, we will take a huge hit on the taxable amounts when converting to Roth IRAs. If we wait 5 years and retire, we know our income will become much lower, and can project tax rates should be lower, but not specify an exact figure. So we will pay taxes then on a larger base at lower rates, and the question would be what numbers will look better. We don’t have access to someone who can give us returns like the kind BD referred to, so the larger base will not be so high that it would tip the scale in the direction of conversion. We decided to go with Newton’s first law.</p>
<p>Dadof3, that is right. There is no hard and fast rule that works for everybody. What works for you might not work for another poster.</p>
<p>I’ll take your word for it, busdriver, but yowee, it still stings!!</p>
<p>
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<p>It depends on what the country would have done with the taxes raised by eliminating these plans - how it would have been spent, and what would have been promised. If, as is demonstrated often, the money is thrown away with nothing to show for it, or worse, the extra money on hand led to more entrenched entitlements without funding, then it indeed would be better that there are some who began to save only because of these incentives, and made themselves less dependent on handouts when they reach retirement.</p>
<p>Savings by a group versus individuals is very double edged. If the group is well managed and with integrity, it is a lot more efficient, but if isn’t, it’s a whole lot worse. I’ll vote with retaining roths and other tax advantaged plans.</p>
<p>Yeah, I know jym. Hopefully it was right for you…I mean, if you aren’t planning on withdrawing it for a long time anyways. We looked at it like Dadof3 did, and it was hard trying to predict the future for us. How do we know what tax rates will be when retirement comes (or at least when we withdraw the money), and how do we even know when we’ll retire? But I think for someone who is retiring pretty soon, knows they’ll be pulling it out, and it will be at a low tax rate…then not worth it.</p>
<p>But what I’m trying to decide is if it’s better to do the IRA/convert to Roth…or fund our 401K, if one was only going to do one thing. Or maybe fully fund the IRA/convert to Roth and partially fund the 401K. I’m not sure how to run the numbers on that, if that’s even possible. Not like we have a bunch of money lying around at this point either.</p>
<p>First thing we advised S is to be sure to contribute whatever he needs to for his employer to add the max to his 401K, then a ROTH IRA, as his income should continue to rise for the next few years. Forecasting always requires projections and best guesses about the future. The planner can only plan based on guesses, that you or someone else supplies.</p>
<p>
Whoa. That is way over my head, busdriver. I read it over 3X and my head is spinning!!</p>
<p>Nah, not over your head, jym, I just didn’t explain it well. So the options are:</p>
<ol>
<li>Contribute fully to 401K</li>
<li>Contribute to IRA, then immediately convert to Roth (so no taxes to convert)</li>
<li>Do some combination of the two, with priority given to the IRA/Roth conversion.</li>
</ol>
<p>So the real question is, the value of the immediate tax deduction of a 401K over the after tax (but never taxed again) Roth. I’m inclined to think it would be best to put priority of the Roth over everything else, but we’ve been contributing to the 401K like robots, so it feels wrong to change that. God knows there aren’t many tax deductions left. I know financial advisors would probably whack me for this, but it seems worth it to even borrow money to do both if needed (can borrow at about 2%).</p>
<p>In HImom’s son’s case, do you mean that you are advising him to contribute whatever the employer will match to 401K first, then Roth, then more 401K? Or totally fund 401K first, then Roth? It seems the first option would be best in most cases.</p>
<p>Which makes me think I just answered my own question!!</p>