Roth Roll 2010?

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Feb 15, 2010 8:19 am

The dollars that you pay in taxes (either from the IRA or elsewhere)are GONE.



They do not earn a return or grow on a compounded basis.



This seems to be a huge angle that is not

being considered by many.



This roll is far from a no-brainer.



what are you recommending to people?



Also, the estate tax crap is insane.   how the hell do you advise people on this?   



Feb 15, 2010 10:14 am

I'm recommending that they figure out if it's good for them or not.  It will make sense for some and not for others.  For many of them, especially if they're bit older and planning on spending that money in retirement, it doesn't make sense.  But for young people or boomers with enough pensions/SS or other income, it absolutely does.  Our FAST software does take that opportunity cost into consideration when we run the scenarios.  You're correct that it's far from a no-brainer for most clients.   Of course, that's why we get paid the big bucks. 

Feb 15, 2010 10:45 am

I get nervous thinking about the younger people with assets, too...remember when SS benefits weren't taxed?  Heck if you go back far enough (1913), income wasn't even taxed.  And look at how they keep ratcheting up the SS tax max (much faster than inflation).

 
I can see a point 20 years from now when some jagoff Congress says "hey, these people with a million bucks, they need to pay their fair share of taxes!" (never mind that they already DID).  I can see this becoming a total bait and switch over time.
Feb 15, 2010 10:47 am
Cowboy93:

I get nervous thinking about the younger people with assets, too...remember when SS benefits weren't taxed? Heck if you go back far enough (1913), income wasn't even taxed. And look at how they keep ratcheting up the SS tax max (much faster than inflation).



I can see a point 20 years from now when some jagoff Congress says "hey, these people with a million bucks, they need to pay their fair share of taxes!" (never mind that they already DID). I can see this becoming a total bait and switch over time.





yep



look at clusterfukc handling of estate tax



Tea party.



next prez wont be dem or rep

Feb 15, 2010 11:18 am
Shania Twain:

The dollars that you pay in taxes (either from the IRA or elsewhere)are GONE.

They do not earn a return or grow on a compounded basis.

This seems to be a huge angle that is not
being considered by many.

This roll is far from a no-brainer.

what are you recommending to people?

Also, the estate tax crap is insane.   how the hell do you advise people on this?   



The Roth conversion does not make any sense whatsoever for people who can't pay the taxes from a non-qualified account.
 
In fact, if you take the money out of your qualified account to pay the taxes you pay the tax penalty AND the 10% early withdrawal (if under 59.5). The numbers never make sense in that case.
 
The Roth conversion makes alot of sense given circumstances like 1) They want to leave the money to family tax free after they die 2) They do not need the money (and they pay the taxes out of non-qualified accounts) so they want to avoid RMD's and/or 3) They are working and are past age 70 (surprisingly common) and want to continue to making contributions or 4) they have no current earned income (And thus cannot contribute to a Roth) but they want the roth's tax benefits so they must roll over to a roth
Feb 15, 2010 11:22 am

PS There is no Federal Estate Tax at the moment (for anyone dying after December 31,2009), so it's state specific as to whether this is an issue at all. Of course tax laws are subject to change so you can argue the 'fear' aspect of it being changed. The current exemption is 3.5 million anyway so it only affects a small percentage of people.

Feb 15, 2010 11:26 am

If the taxes paid are less than the taxes that you would pay later, the deal works. If you can arrange a low tax environment (no work) for a year, convert at a max 15% tax rate and then return to high earnings, maybe that works.

Feb 15, 2010 11:33 am

Not really.

 
Here's the problem. The taxes you pay now, do not ever earn any future returns. So if you go from 30% taxes on 200k (60k) to 15% taxes on 200k (your example) the 30k you 'saved' on taxes never earns a return of any kind. The numbers almost never work out.
 
The reason paying the tax now out of a non-qualified account makes sense is because that money never grows tax deferred and/or tax free. So the difference in your growth rate of that money vs. the growth rate of your money in your tax advantaged account is quite substantial (after tax of course). That's why those numbers often do make sense.
 
Using the 'your future tax rate may be lower than your current tax rate' is way to simplistic. It assumes future tax rates will be higher (which they may, or they may not) and it does not take into account the growth of the money you paid taxes on. It does not account for your current age/income and/or your spousal status or your estate planning needs. It's just a way to simplistic view of the situation.
Feb 15, 2010 11:39 am
Cowboy93:

I get nervous thinking about the younger people with assets, too...remember when SS benefits weren't taxed?  Heck if you go back far enough (1913), income wasn't even taxed.  And look at how they keep ratcheting up the SS tax max (much faster than inflation).

 
I can see a point 20 years from now when some jagoff Congress says "hey, these people with a million bucks, they need to pay their fair share of taxes!" (never mind that they already DID).  I can see this becoming a total bait and switch over time.


Misinformation.
 
The current tax rates are some of the lowest in history. In fact, during the 1960's the highest tax bracket was 90%. Arguing future tax rates will be higher is a fear tactic and, while a useful 'sales tool', it can be very misleading. The 'tax' on SS benefits is still Zero. What you are referring to is the taxes you pay on your total income that can include SS income. It's misleading because you are effectively being taxed on you other income (Pensions, interest, dividends, wages, etc). They do this so that you don't show a lower income that you really had.
 
If you all you had was SS income you would pay zero taxes. It know it's semantics and up to 85% of your SS income can be used to calculate  your tax rate, but if you really look at it you aren't taxed on your SS income per se.
Feb 15, 2010 12:34 pm

It's indeed a great marketing opportunity. I think the best opportunity is to show people that sometimes the best decision is NO decision. That builds credibility immediately.

Feb 15, 2010 3:37 pm
LSUAlum:



Misinformation.
 
The current tax rates are some of the lowest in history. In fact, during the 1960's the highest tax bracket was 90%. Arguing future tax rates will be higher is a fear tactic and, while a useful 'sales tool', it can be very misleading. The 'tax' on SS benefits is still Zero. What you are referring to is the taxes you pay on your total income that can include SS income. It's misleading because you are effectively being taxed on you other income (Pensions, interest, dividends, wages, etc). They do this so that you don't show a lower income that you really had.
 
If you all you had was SS income you would pay zero taxes. It know it's semantics and up to 85% of your SS income can be used to calculate  your tax rate, but if you really look at it you aren't taxed on your SS income per se.

Wow, do you for the Federal government?  That is quite a spin.
 
I disagree with the "taxes are higher guaranteed" fear tactic as well.  What I am saying is that there are many unknowable unknowns when projecting 20 years out.  I agree with the original poster--the only guarantee is that the money used to pay your current tax bill (OK, maybe delayed until 2011 and 2012) is gone.  I am inclined to recommend people keep deferring unless they truly understand the risk of the unpredictable behavior of future lawmakers (just play WHAT IF? of the double tapping their "tax-free" asset (the Roth)).
 
Why are the following all potentially taxable even if we are talking about the same activity generating the money:  company makes money (taxed), pays employee (taxed), employee buys a stock and gets a dividend (taxed), sells stock at a profit (taxed), dies (taxed).  I'm just saying forcing "rich" people (or their beneficiaries) to pay taxes on a Roth is not something Congress would avoid on moral grounds in 2035.
Feb 15, 2010 3:58 pm
LSUAlum:

Not really.





Here's the problem. The taxes you pay now, do not ever earn any future returns.

So if you go from 30% taxes on 200k (60k) to 15% taxes on 200k (your example) the 30k you 'saved' on taxes never earns a return of any kind. The numbers almost never work out.



[





yep. and screw where it comes from.   It is still part of your assets that is gone and does not grow.   

Feb 15, 2010 4:27 pm


2008 No. 4

Table of Contents





Taxes:

Hauser’s Law





By W. Kurt Hauser and David Ranson





Soak the rich? You can’t. A vital observation, first noted by former Hoover board chairman W. Kurt Hauser, banished this bit of wishful thinking. By David Ranson.









--------------------------------------------------------------------------------

W. Kurt Hauser is a San Francisco investment economist who published fresh and eye-opening data about the federal tax system fifteen years ago. His findings imply that there are draconian constraints on the ability of higher taxes to generate fresh revenues. I think his discovery deserves to be called Hauser’s law, because it is as central to the economics of taxation as Boyle’s law is to the physics of gases. Yet economists and policy makers are barely aware of it.



Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example.



The interactions among the myriad participants in a tax system are as impossible to unravel as are those of the molecules in a gas, and the effects of tax policies are speculative and highly contentious. Will raising tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?



Hauser uncovered the means to answer these questions definitively. In a Wall Street Journal article in 1993, he stated that “no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of GDP.” What a pity that his discovery has not been more widely disseminated.



The chart on this page, updating the evidence to 2007, confirms Hauser’s law. The federal tax yield (revenues divided by GDP) has remained close to 19.5 percent, even as the top tax bracket was brought down from 91 percent to the present 35 percent. This should cut the Gordian knot of tax policy debate.



The data show that the tax yield has been independent of marginal tax rates during this period but that tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP.



What happens if we instead raise tax rates? Economists of all persuasions accept that a tax-rate increase would reduce GDP, in which case Hauser’s law says it would also lower tax revenue. That is a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich—if they knew about it.



An Inconvenient Tax Truth



Although Hauser’s law sounds like a restatement of the Laffer curve (and Hauser did cite Arthur Laffer in his original article), it has independent validity. Because Laffer’s curve is a theoretical insight, theoreticians find it easy to quibble with. Test cases, in which the economy responds to a tax change, lend themselves to many alternative explanations. Conventional economists, despite immense publicity, have yet to swallow the Laffer curve. When it is mentioned at all by critics, it is often as an object of scorn.



Economics is often poisoned by political wishful thinking. Taxation is an important example.

Because Hauser’s horizontal straight line is a simple fact, it is ultimately far more compelling. It also presents a major opportunity. It seems likely that the tax system could maintain a 19.5 percent yield with a top bracket even lower than 35 percent.



What makes Hauser’s law work? For supply-siders, there is no mystery. As Hauser said: “Raising taxes encourages taxpayers to shift, hide, and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.”



Putting it a different way, capital migrates away from regimes in which it is treated harshly and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax intolerant.



The economics of taxation will be moribund until economists accept and explain Hauser’s law. They will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge. And if this requires overturning reigning doctrine, then so be it.



Presidential candidates, instead of disputing how much more tax to impose on whom, would be better advised to come up with plans for increasing GDP and ridding the tax system of its wearying complexity. That would be a formula for success.





--------------------------------------------------------------------------------



This essay appeared in the Wall Street Journal on May 20, 2008.





--------------------------------------------------------------------------------

David Ranson is head of research at H.C. Wainwright & Co. Economics Inc.





--------------------------------------------------------------------------------

Copyright © 2010 by the Board of Trustees of Leland Stanford

Feb 15, 2010 4:42 pm

It makes sense when you have reason to beleive your marginal rate today in lower than when you take out the money.  If you're unemployes for 6 months of 2010.  If you're abusiness owner and you have a bunch of losses, etc.  Definitely not a no brainer.

 
i do like the Roth 401K contribution, especially for young professionals, for similare reasons, but it makes sense for a greater % of the population.