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Old 08-24-2017, 09:12 PM
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Join Date: Aug 2017
Posts: 3
Withdrawal from Traditional IRA

Hi,

From past 3 years I am contributing to Traditional IRA. I figured it out couple of things recently.

As I am contributing to 401(K) at workplace, now on top of it even the contribution to Traditional IRA does not make sense. Instead of that transferring to ROTH IRA is better as the withdrawn amount is tax free after 5 years.

Considering the above scenario, should I convert my Traditional IRA amount to ROTH IRA? Will I be paying any penality now? Any other tax implications?

I have contributed to Traditional IRA in 2017 as well. Should I withdraw that as well.

Please suggest.

Thanks in advance.



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Old 08-25-2017, 01:43 AM
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Posts: 4,835
Quote:
Originally Posted by taxReturnsQ View Post
Hi,

From past 3 years I am contributing to Traditional IRA. I figured it out couple of things recently.

As I am contributing to 401(K) at workplace, now on top of it even the contribution to Traditional IRA does not make sense. Instead of that transferring to ROTH IRA is better as the withdrawn amount is tax free after 5 years.

Considering the above scenario, should I convert my Traditional IRA amount to ROTH IRA? Will I be paying any penality now? Any other tax implications?

I have contributed to Traditional IRA in 2017 as well. Should I withdraw that as well.

Please suggest.

Thanks in advance.
Considering the above scenario, should I convert my Traditional IRA amount to ROTH IRA?=======>>I guess you basically need to understand the difference between traditional IRA and R-IRA; The type of ira you choose can significantly affect your and your family?s long-term savings. So it?s worth understanding the differences between Traditional IRAs and R- IRAs in order to select the best one for you. Both Traditional and R-IRAs provide generous tax breaks. But it?s a matter of timing when you get to claim them. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. R-IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. So with Traditional IRAs, you avoid taxes when you put the money in. With R-IRAs, you avoid taxes when you take it out in retirement.
Of course, with both types of IRAs, you pay no taxes whatsoever on all of the growth of your contributed funds, as long as they remain in the account. Still, you can ask yourself some basic questions about your personal situation: Which federal tax bracket are you in today? Do you expect to be in a higher or lower one after you retire? Will your annual income increase or decrease? Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. You?ll be collecting and owing taxes on Social Security payments. You might opt to do some consulting or free-lance work, on which you?ll have to pay self-employment tax. And once the kids are grown and you stop adding to the retirement nest egg, you lose some valuable tax deductions and tax credits. All this could leave you with higher taxable income, even after you stop working full-time.you need to get some professional help from a retirement admin.


Will I be paying any penality now?========>> Converting a traditional IRA to a R-ira gives you that future tax-free benefit, but at an immediate tax cost. You'll have to pay taxes on contributions that you previously deducted, as well as on the account's earnings. Conversion also could push you into a higher tax bracket, especially if you've accumulated sizable earnings over the years. True, only the portion of your income that falls into that new bracket will be taxed at the higher rate, but it's still an added bonus for the IRS at your expense.Then you must consider exactly how to cover the conversion taxes. Some account holders end up using money from the traditional account to meet this obligation. Not a good idea, say experts, because that reduces, sometimes dramatically, your retirement holdings.Plus, if you're younger than 59?, when you take out the cash to pay the IRS, you'll also face a 10 %early distribution penalty.Upon facing such tax considerations, some traditional IRA holders decide to forgo conversion. But that might not be the only, or best, option/


Any other tax implications?======>>> Income reported on a Roth conversion increases income. Thus a Roth conversion could increase taxable income and could trigger various phaseouts. An increase in taxable income is fairly easy to figure out. Take a look at the marginal tax rates for the year in which you are converting. An increase in taxable income will cost you, roughly, your marginal tax rate times the conversion value. Be aware that a Roth conversion could push you into a higher tax bracket.Analyzing various phaseouts is a bit more complicated to figure out. Higher income could result in more Social Security benefits being subject to tax, or could trigger a phaseout or elimination of various deductions or tax credits, or could result in less of your itemized deductions being utilized, or could increase your alternative minimum tax. Hence the best way to figure out the impact of a Roth conversion on these various items is to run a projection in your tax software to analyze the tax increase resulting from a Roth conversion.
Converting to a Roth IRA makes sense if, in my opinion, ;You have funds (outside of a retirment account) to fully pay the tax for converting to a Roth;The value of your traditional IRAs has fallen, and converting now is more affordable;You expect to be in roughly the same tax bracket or in a higher tax bracket in retirement than you are in currently; You can utilize losses or deductions or credits to help offset the tax impact of a Roth conversion.as said previously, converting to a Roth basically means you are paying tax now in exchange for future tax-free withdrawals from your IRA. Paying tax now only makes sense if you expect to be in roughly the same or higher tax bracket in retirement than you are now. If you are in the 25% tax bracket now, and expect to be in the 25% tax bracket in retirement, why should you prepay your taxes? Granted, by converting now, your funds can grow and be withdrawn tax-free. Which means that, potentially, you are paying 25% on a lower dollar amount rather than 25% on a higher dollar amount later. But you also give up the opportunity to spread out your IRA withdrawals over time, which could help minimize any tax impact.Converting to a Roth IRA does not make sense, in my opinion, ifYou do not have cash funds sufficient to fully pay the tax of the Roth conversion;You expect to be in a lower tax bracket in retirement than you are in currently;You may need to tap into your IRA funds in the next five years and you are or will be younger than age 59.5 when you need to tap into these funds.In general it does not make much sense to pay tax now at a higher tax rate if you reasonably expect to be in a lower tax bracket in retirement. It also does not make sense to pay tax now if you might need to tap into those funds in the next five years, in which case you will essentially be paying tax twice, once on the conversion and again on the withdrawal, plus any penalties that might apply.
Figuring out how much you can afford to convert involves crunching the numbers on the tax cost of a Roth conversion. However I do see the mathematical appeal of converting all IRA funds at once in order to take advantage of the tax-free status of Roth IRAs. Here's some tips to aide you in optimizing how much of a traditional IRA to convert to a Roth IRA.
Consider any losses or deductions you will be eligible for in the year of the Roth conversion that could help reduce the tax cost of the conversion.Consider the cash funds you have to pay the additional tax. If you cannot afford to pay for converting all your traditional IRAs to a Roth, figure out how much you can afford to convert. You can always convert portions of your Roth IRA over multiple years.Consider the time horizon for your investments. If you are going to need some of your IRA funds in the next 5 years, keep those in your traditional IRA. Not only does this preserve the tax-deferred status of your IRA, it can help prevent you from incurring a double tax-hit on the Roth conversion.


I have contributed to Traditional IRA in 2017 as well. Should I withdraw that as well.=====>>as mentioned above; you may refer to what I mentioned above



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Old 08-25-2017, 10:00 AM
Junior Member
 
Join Date: Aug 2017
Posts: 3
Thanks for the detailed response.

I assume that my tax bracket during retirment will go down. I understand the difference between traditional IRA and ROTH IRA, only thing which is bothering me right now is as I am already maxed-out my 401(k), putting the extra money into Tradional IRA does not makes sense, because I don't get the tax benefit either now nor when I withdraw after retirement. Whereas If I put my money in ROth IRA even though I am taxed now which is the same in traditional ira as well in my case, but after 5 years or after retirment I don't need to pay taxes.

I agree with you converting to ROTH IRA now, makes me to pay penality and tax. Instead of that leave the money as it is what ever in tradional IRA and hereafter contribute to ROTH IRA.

Am I correct or missing a point here.

Thanks a lot once again.



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Old 08-25-2017, 10:18 AM
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Join Date: Aug 2017
Posts: 3
Quote:
Originally Posted by Wnhough View Post
Considering the above scenario, should I convert my Traditional IRA amount to ROTH IRA?=======>>I guess you basically need to understand the difference between traditional IRA and R-IRA; The type of ira you choose can significantly affect your and your family?s long-term savings. So it?s worth understanding the differences between Traditional IRAs and R- IRAs in order to select the best one for you. Both Traditional and R-IRAs provide generous tax breaks. But it?s a matter of timing when you get to claim them. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. R-IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. So with Traditional IRAs, you avoid taxes when you put the money in. With R-IRAs, you avoid taxes when you take it out in retirement.
Of course, with both types of IRAs, you pay no taxes whatsoever on all of the growth of your contributed funds, as long as they remain in the account. Still, you can ask yourself some basic questions about your personal situation: Which federal tax bracket are you in today? Do you expect to be in a higher or lower one after you retire? Will your annual income increase or decrease? Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. You?ll be collecting and owing taxes on Social Security payments. You might opt to do some consulting or free-lance work, on which you?ll have to pay self-employment tax. And once the kids are grown and you stop adding to the retirement nest egg, you lose some valuable tax deductions and tax credits. All this could leave you with higher taxable income, even after you stop working full-time.you need to get some professional help from a retirement admin.


Will I be paying any penality now?========>> Converting a traditional IRA to a R-ira gives you that future tax-free benefit, but at an immediate tax cost. You'll have to pay taxes on contributions that you previously deducted, as well as on the account's earnings. Conversion also could push you into a higher tax bracket, especially if you've accumulated sizable earnings over the years. True, only the portion of your income that falls into that new bracket will be taxed at the higher rate, but it's still an added bonus for the IRS at your expense.Then you must consider exactly how to cover the conversion taxes. Some account holders end up using money from the traditional account to meet this obligation. Not a good idea, say experts, because that reduces, sometimes dramatically, your retirement holdings.Plus, if you're younger than 59?, when you take out the cash to pay the IRS, you'll also face a 10 %early distribution penalty.Upon facing such tax considerations, some traditional IRA holders decide to forgo conversion. But that might not be the only, or best, option/


Any other tax implications?======>>> Income reported on a Roth conversion increases income. Thus a Roth conversion could increase taxable income and could trigger various phaseouts. An increase in taxable income is fairly easy to figure out. Take a look at the marginal tax rates for the year in which you are converting. An increase in taxable income will cost you, roughly, your marginal tax rate times the conversion value. Be aware that a Roth conversion could push you into a higher tax bracket.Analyzing various phaseouts is a bit more complicated to figure out. Higher income could result in more Social Security benefits being subject to tax, or could trigger a phaseout or elimination of various deductions or tax credits, or could result in less of your itemized deductions being utilized, or could increase your alternative minimum tax. Hence the best way to figure out the impact of a Roth conversion on these various items is to run a projection in your tax software to analyze the tax increase resulting from a Roth conversion.
Converting to a Roth IRA makes sense if, in my opinion, ;You have funds (outside of a retirment account) to fully pay the tax for converting to a Roth;The value of your traditional IRAs has fallen, and converting now is more affordable;You expect to be in roughly the same tax bracket or in a higher tax bracket in retirement than you are in currently; You can utilize losses or deductions or credits to help offset the tax impact of a Roth conversion.as said previously, converting to a Roth basically means you are paying tax now in exchange for future tax-free withdrawals from your IRA. Paying tax now only makes sense if you expect to be in roughly the same or higher tax bracket in retirement than you are now. If you are in the 25% tax bracket now, and expect to be in the 25% tax bracket in retirement, why should you prepay your taxes? Granted, by converting now, your funds can grow and be withdrawn tax-free. Which means that, potentially, you are paying 25% on a lower dollar amount rather than 25% on a higher dollar amount later. But you also give up the opportunity to spread out your IRA withdrawals over time, which could help minimize any tax impact.Converting to a Roth IRA does not make sense, in my opinion, ifYou do not have cash funds sufficient to fully pay the tax of the Roth conversion;You expect to be in a lower tax bracket in retirement than you are in currently;You may need to tap into your IRA funds in the next five years and you are or will be younger than age 59.5 when you need to tap into these funds.In general it does not make much sense to pay tax now at a higher tax rate if you reasonably expect to be in a lower tax bracket in retirement. It also does not make sense to pay tax now if you might need to tap into those funds in the next five years, in which case you will essentially be paying tax twice, once on the conversion and again on the withdrawal, plus any penalties that might apply.
Figuring out how much you can afford to convert involves crunching the numbers on the tax cost of a Roth conversion. However I do see the mathematical appeal of converting all IRA funds at once in order to take advantage of the tax-free status of Roth IRAs. Here's some tips to aide you in optimizing how much of a traditional IRA to convert to a Roth IRA.
Consider any losses or deductions you will be eligible for in the year of the Roth conversion that could help reduce the tax cost of the conversion.Consider the cash funds you have to pay the additional tax. If you cannot afford to pay for converting all your traditional IRAs to a Roth, figure out how much you can afford to convert. You can always convert portions of your Roth IRA over multiple years.Consider the time horizon for your investments. If you are going to need some of your IRA funds in the next 5 years, keep those in your traditional IRA. Not only does this preserve the tax-deferred status of your IRA, it can help prevent you from incurring a double tax-hit on the Roth conversion.


I have contributed to Traditional IRA in 2017 as well. Should I withdraw that as well.=====>>as mentioned above; you may refer to what I mentioned above
Thanks for the detailed response.

I assume that my tax bracket during retirment will go down. I understand the difference between traditional IRA and ROTH IRA, only thing which is bothering me right now is as I am already maxed-out my 401(k), putting the extra money into Tradional IRA does not makes sense, because I don't get the tax benefit either now nor when I withdraw after retirement. Whereas If I put my money in ROth IRA even though I am taxed now which is the same in traditional ira as well in my case, but after 5 years or after retirment I don't need to pay taxes.

I agree with you converting to ROTH IRA now, makes me to pay penality and tax. Instead of that leave the money as it is what ever in tradional IRA and hereafter contribute to ROTH IRA.

Am I correct or missing a point here.

Thanks a lot once again.



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  #5 (permalink)  
Old 08-25-2017, 11:55 AM
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Join Date: Oct 2010
Posts: 4,835
Quote:
Originally Posted by taxReturnsQ View Post
Thanks for the detailed response.

I assume that my tax bracket during retirment will go down. I understand the difference between traditional IRA and ROTH IRA, only thing which is bothering me right now is as I am already maxed-out my 401(k), putting the extra money into Tradional IRA does not makes sense, because I don't get the tax benefit either now nor when I withdraw after retirement. Whereas If I put my money in ROth IRA even though I am taxed now which is the same in traditional ira as well in my case, but after 5 years or after retirment I don't need to pay taxes.

I agree with you converting to ROTH IRA now, makes me to pay penality and tax. Instead of that leave the money as it is what ever in tradional IRA and hereafter contribute to ROTH IRA.

Am I correct or missing a point here.

Thanks a lot once again.
I assume that my tax bracket during retirment will go down. I understand the difference between traditional IRA and ROTH IRA, only thing which is bothering me right now is as I am already maxed-out my 401(k), putting the extra money into Tradional IRA does not makes sense, because I don't get the tax benefit either now nor when I withdraw after retirement.=======> you can contribute to a traditional IRA even if you participate in an employer-sponsored retirement plan (including a 401K); However, you might not be able to deduct all of your traditional IRA contributions if you / your spouse participates in 401K plan. IRA deductibility is impacted by participation in a 401(k) plan, and other employer retirement plans. the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status.?



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