max momo
Contributor
Are you converting an IRA into a ROTH IRA ('ROTH Conversion), maybe?
Maybe not a bad idea, maybe...
(Or: Why the stock markets may face a major retraction in the next 24 months).
If you are converting 100k, for example, from a traditional IRA (and assuming relatively stable income history and claimed deductions) then that 100k is taxable. However, the regulations are such that not all that 100k will hit your return this year as taxable income. Some of that taxable income will be rolled back into 2011 and 2012. Half is added to the 2011 income and the other half (50k in this example) hits the 2012 income return. So, for those close to the 25% marginal income rate, this is an opportunity to minimize your taxable income for two years on part of that taxable income (the converted traditional IRA).
One potential drawback:
That 100k, in this example, rolled from the Traditional into the ROTH IRA is now fully characterized as 100k ROTH money. What if, between now and the end of 2011 (or 2012), the 100k that you put into the ROTH IRA was entered into stock market (or bonds or whatever) and the stock market tanks? Well what happens is this: Your account may go down in value, lets say down by 30% (such as was the case for may in 2008) and now your account is only worth 70k. How3ever, you still will have to pay taxes on that fully characterized 100k, even though you only have 70kleft!
Not far fetched at all, in fact you only need to go back 10 years to see that this was EXACTLY THE CASE with the last Traditional to ROTH conversion window in 1998. (At that time you could spread the rollover over four tax years). Folks that ran 100k after the go-go stock market runup in the 1990s lost, in some cases, 40k in the 2000 NASDAQ crash. So, they had to pay income tax on phantom gains.
Same as it was last couple years with folks who enacted short sales on their real estate. Some folks could no longer make their mortgage payment on a 300k mortgage when the house was now only worth 200k. The bank accepts a short sale at 200k, and the IRS hit them with a bill for taxable income of 100k.
The law of unintended consequences.
Or, as some have pointed out: Just another scam engineered to separate you form you money and force your pawnage onto the largesse of the nanny state..
[There is a strategic move here, file a tax extension so that you can push back your filing until the middle of October, after you have another six month window into stock market performance.]
Maybe not a bad idea, maybe...
(Or: Why the stock markets may face a major retraction in the next 24 months).
If you are converting 100k, for example, from a traditional IRA (and assuming relatively stable income history and claimed deductions) then that 100k is taxable. However, the regulations are such that not all that 100k will hit your return this year as taxable income. Some of that taxable income will be rolled back into 2011 and 2012. Half is added to the 2011 income and the other half (50k in this example) hits the 2012 income return. So, for those close to the 25% marginal income rate, this is an opportunity to minimize your taxable income for two years on part of that taxable income (the converted traditional IRA).
One potential drawback:
That 100k, in this example, rolled from the Traditional into the ROTH IRA is now fully characterized as 100k ROTH money. What if, between now and the end of 2011 (or 2012), the 100k that you put into the ROTH IRA was entered into stock market (or bonds or whatever) and the stock market tanks? Well what happens is this: Your account may go down in value, lets say down by 30% (such as was the case for may in 2008) and now your account is only worth 70k. How3ever, you still will have to pay taxes on that fully characterized 100k, even though you only have 70kleft!
Not far fetched at all, in fact you only need to go back 10 years to see that this was EXACTLY THE CASE with the last Traditional to ROTH conversion window in 1998. (At that time you could spread the rollover over four tax years). Folks that ran 100k after the go-go stock market runup in the 1990s lost, in some cases, 40k in the 2000 NASDAQ crash. So, they had to pay income tax on phantom gains.
Same as it was last couple years with folks who enacted short sales on their real estate. Some folks could no longer make their mortgage payment on a 300k mortgage when the house was now only worth 200k. The bank accepts a short sale at 200k, and the IRS hit them with a bill for taxable income of 100k.
The law of unintended consequences.
Or, as some have pointed out: Just another scam engineered to separate you form you money and force your pawnage onto the largesse of the nanny state..
[There is a strategic move here, file a tax extension so that you can push back your filing until the middle of October, after you have another six month window into stock market performance.]
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