ROTH Tax Hit
Mike
not been keeping up w/ my ROTH deductions (contribute to 401K at work). I'm
thining of converting some of the CD money, say 5$K for starters, even
though I may need it in less than five years. I know I can w/d the
principal at any time w/o penalty but what are the penalties on the profits
made on the ROTH investments? It probably can't be more than the 25% in
federal taxes I'm paying now and state tax on the interest, what do you
think?
Mike
Charlie Perrin
>I've got a money in CDs that I'm tired of paying taxes on every year. I've
>not been keeping up w/ my ROTH deductions (contribute to 401K at work). I'm
>thining of converting some of the CD money, say 5$K for starters, even
>though I may need it in less than five years. I know I can w/d the
>principal at any time w/o penalty but what are the penalties on the profits
>made on the ROTH investments?
You have to pay tax on them unless you're 59 1/2 or disabled (or a few
other small cases).
>It probably can't be more than the 25% in federal taxes I'm paying now
>and state tax on the interest, what do you think?
The 10% penalty tax on early withdrawal from a retirement account
applies.
Jerry
excess of the CD deposit amounts if you have made other deposits that are at
least as great as this amount and the account is vested. If you do not have
any other base deposits, you would pay a penalty plus taxes on this amount.
These are just my thoughts - you need to verify.
Jerry
"Mike" <12...@yahoo.com> wrote in message news:ptE5i.19$Au6.16@trndny04...
Ernie Klein
> I've got a money in CDs that I'm tired of paying taxes on every year. I've
> not been keeping up w/ my ROTH deductions (contribute to 401K at work). I'm
> thining of converting some of the CD money, say 5$K for starters, even
> though I may need it in less than five years.
A couple of comments for clarification purposes (I don't mean to
nit-pick on the use of terms, but they _are_ important when dealing with
IRA's).
First I am assuming that the CD's you are speaking of are NOT being held
in any type of tax deferred account or you wouldn't be concerned about
paying tax on the interest in the first place.
You can only "convert" to a ROTH ITA if the funds are presently held in
a traditional IRA, a SEP, or simple IRA, which I assume is not the case.
Assuming you meant that you really want to use the CD money to
"contribute" to a ROTH, you say "5$K for starters". The most that you
can contribute to all IRA's within one year is $4000 unless you are over
50 (over 50 there is an additional "catch up" amount, $3000 for 2007).
In addition you can't contribute to an ROTH IRA at all if your AGI
(adjusted gross income) is too much. The amount depends on your filing
status. See Pub 590 for charts and phase out worksheets (see below).
(If your married and in the %25 tax bracket then you might be able to
contribute to a ROTH, but if your effective tax rate is 25% then you
probably earn too much to qualify.)
> I know I can w/d the
> principal at any time w/o penalty but what are the penalties on the profits
> made on the ROTH investments? It probably can't be more than the 25% in
> federal taxes I'm paying now and state tax on the interest, what do you
> think?
Unless the distribution of the earnings is "qualified", meaning that it
has been in the ROTH for at least 5 years, AND you are over 59 1/2, OR
it is to buy your first home, OR you are disabled, then it may be
subject to an ADDITIONAL 10% penalty. Because it is not qualified you
still have to include it as interest income and pay tax at your normal
rate plus the penalty -- so instead of paying 25% you could be paying up
to 35%.
IRA's are meant to be long term for retirement (the R in IRA) and not
short term bank accounts, hence the conditions and penalties that are
put on early withdrawels.
I would suggest you go to the IRS site and download Pub 590 which will
tell you all about IRA's and taxes.
http://www.irs.gov/formspubs/lists/0,,id=97819,00.html
--
-Ernie-
Mike
"Charlie Perrin" <nikv...@sbcglobal.net.NOSPAM> wrote in message
news:ak5e53lmtnfrg4u0b...@4ax.com...
on them unless you're 59 1/2 or disabled (or a few
> other small cases).
>
>>It probably can't be more than the 25% in federal taxes I'm paying now
>>and state tax on the interest, what do you think?
>
> The 10% penalty tax on early withdrawal from a retirement account
> applies.
I meet the Age requirement but may not meet the five years in ROTH before
w/d.
Ernie Klein
In article <ptE5i.19$Au6.16@trndny04>, "Mike" <12...@yahoo.com> wrote:
> I've got a money in CDs that I'm tired of paying taxes on every year. I've
> not been keeping up w/ my ROTH deductions (contribute to 401K at work). I'm
> thining of converting some of the CD money, say 5$K for starters, even
> though I may need it in less than five years.
A couple of comments for clarification purposes (I don't mean to
nit-pick on the use of terms, but they _are_ important when dealing with
IRA's).
First I am assuming that the CD's you are speaking of are NOT being held
in any type of tax deferred account or you wouldn't be concerned about
paying tax on the interest in the first place.
You can only "convert" to a ROTH ITA if the funds are presently held in
a traditional IRA, a SEP, or simple IRA, which I assume is not the case.
Assuming you meant that you really want to use the CD money to
"contribute" to a ROTH, you say "5$K for starters". The most that you
can contribute to all IRA's within one year is $4000 unless you are over
50 (over 50 there is an additional "catch up" amount, $3000 for 2007).
In addition you can't contribute to an ROTH IRA at all if your AGI
(adjusted gross income) is too much. The amount depends on your filing
status. See Pub 590 for charts and phase out worksheets (see below).
(If your married and in the %25 tax bracket then you might be able to
contribute to a ROTH, but if your effective tax rate is 25% then you
probably earn too much to qualify.)
> I know I can w/d the
> principal at any time w/o penalty but what are the penalties on the profits
> made on the ROTH investments? It probably can't be more than the 25% in
> federal taxes I'm paying now and state tax on the interest, what do you
> think?
Unless the distribution of the earnings is "qualified", meaning that it
Mike
"Ernie Klein" <eck...@pacbell.net> wrote in message
news:ecklein-6A3436...@news.newsguy.com...
> In article <ptE5i.19$Au6.16@trndny04>, "Mike" <12...@yahoo.com> wrote:
>
> First I am assuming that the CD's you are speaking of are NOT being held
> in any type of tax deferred account or you wouldn't be concerned about
> paying tax on the interest in the first place.
The CDs are not locked into any type of tax deferred accts.
>
> You can only "convert" to a ROTH ITA if the funds are presently held in
> a traditional IRA, a SEP, or simple IRA, which I assume is not the case.
Doesn't apply in this case.
you meant that you really want to use the CD money to
> "contribute" to a ROTH, you say "5$K for starters". The most that you
> can contribute to all IRA's within one year is $4000 unless you are over
> 50 (over 50 there is an additional "catch up" amount, $3000 for 2007).
I pass the >59.5 y/o test but may not pass the held >five years before w/d.
I'd like to transfer the max, $5K, this year.
epends on your filing
> status. See Pub 590 for charts and phase out worksheets (see below).
> (If your married and in the %25 tax bracket then you might be able to
> contribute to a ROTH, but if your effective tax rate is 25% then you
> probably earn too much to qualify.)
Oh, didn't think of that. Taxes have been killing me. I was have more
withheld
then needed.
he profits
>> made on the ROTH investments? It probably can't be more than the 25% in
>> federal taxes I'm paying now and state tax on the interest, what do you
>> think?
>
> Unless the distribution of the earnings is "qualified", meaning that it
> has been in the ROTH for at least 5 years, AND you are over 59 1/2, OR
> it is to buy your first home, OR you are disabled, then it may be
> subject to an ADDITIONAL 10% penalty. Because it is not qualified you
> still have to include it as interest income and pay tax at your normal
> rate plus the penalty -- so instead of paying 25% you could be paying up
> to 35%.
That's what I thought. If I invest it in high return stocks (risk isn't an
issue) and pay 35% on the earnings if I w/d it <five years. Even if I don't
invest it just let let collect >5% APR I may be better off paying the
penalty when/if I w/d it then keeping it as a CD and paying 25% on the
interest. My plan is to continue contributions to the 401K, add $5K a
year to my ROTH and continue investiong.
>
> IRA's are meant to be long term for retirement (the R in IRA) and not
> short term bank accounts, hence the conditions and penalties that are
> put on early withdrawels.
>
> I would suggest you go to the IRS site and download Pub 590 which will
> tell you all about IRA's and taxes.
Will do.
>
> http://www.irs.gov/formspubs/lists/0,,id=97819,00.html
>
> --
> -Ernie-
Mike
"Jerry" <nospam@???> wrote in message
news:46571a96$0$9903$4c36...@roadrunner.com...
> Payments and profits are considered in total. Thus, you could withdraw in
> excess of the CD deposit amounts if you have made other deposits that are
> at least as great as this amount and the account is vested. If you do not
> have any other base deposits, you would pay a penalty plus taxes on this
> amount. These are just my thoughts - you need to verify.
>
for the tax impaired?
BTW, right now I use the money in my ROTH investing in high risk stocks as I
kind of view it
as not enough cash to really impact on my retirement.
Ben Sharvy
Ignore it. It's wrong.
Jerry
5% to give you a balance of 2.1K, you should be able to withdraw 2K without
penalty, if the account is vested. Again you should verify, this is just my
understanding.
Jerry
"Mike" <12...@yahoo.com> wrote in message news:BjK5i.39$eO5.4@trndny08...
Ernie Klein
> "Ernie Klein" <eck...@pacbell.net> wrote in message
>
> > you meant that you really want to use the CD money to
> > "contribute" to a ROTH, you say "5$K for starters". The most that you
> > can contribute to all IRA's within one year is $4000 unless you are over
> > 50 (over 50 there is an additional "catch up" amount, $3000 for 2007).
>
> I pass the >59.5 y/o test but may not pass the held >five years before w/d.
> I'd like to transfer the max, $5K, this year.
>
I meant to say $1000 catch up. For 2008 it goes up to $2000 so the max
contribution will be $6000 for over age 50.
>
> > epends on your filing
> > status. See Pub 590 for charts and phase out worksheets (see below).
> > (If your married and in the %25 tax bracket then you might be able to
> > contribute to a ROTH, but if your effective tax rate is 25% then you
> > probably earn too much to qualify.)
>
> Oh, didn't think of that. Taxes have been killing me. I was have more
> withheld
> then needed.
Assuming you file "Married jointly" the phase out for 2007 starts at a
modified AGI of $156K. If your modified AGI is $166K or more, you
cannot contribute to a ROTH IRA. (See chart on page 58 of Pub 590).
--
-Ernie-
Ernie Klein
"Jerry" <nospam@???> wrote:
> In other words say you deposited 1K in a CD and 1K in stock and each earned
> 5% to give you a balance of 2.1K, you should be able to withdraw 2K without
> penalty, if the account is vested. Again you should verify, this is just my
> understanding.
Doesn't make sense to me either. Are you talking about investments in
the ROTH IRA. Then yes, if you contribute 2K to the ROTH and then
invest 1K into a CD and 1K into stock, you can withdraw up to the 2K
contribution without penalty. It is the earnings that are subject to
penalty.
There are "ordered rules" for withdrawing from a ROTH. They are:
1) Regular Contributions.
2) Conversion contributions. (conversions from a traditional IRA etc)
3) Earnings on contributions.
However, the OP's CD is not presently in an IRA of any kind, so I am
still not quite how what you said applies to his situation.
> Jerry
> "Mike" <12...@yahoo.com> wrote in message news:BjK5i.39$eO5.4@trndny08...
> >
> > "Jerry" <nospam@???> wrote in message
> > news:46571a96$0$9903$4c36...@roadrunner.com...
> >> Payments and profits are considered in total. Thus, you could withdraw
> >> in excess of the CD deposit amounts if you have made other deposits that
> >> are at least as great as this amount and the account is vested. If you
> >> do not have any other base deposits, you would pay a penalty plus taxes
> >> on this amount. These are just my thoughts - you need to verify.
> >>
> > I read your reply twice but I don't understand it. Could you simplify it
> > for the tax impaired?
> > BTW, right now I use the money in my ROTH investing in high risk stocks as
> > I kind of view it
> > as not enough cash to really impact on my retirement.
> >
> >
--
-Ernie-
Mike
"Jerry" <nospam@???> wrote in message
> In other words say you deposited 1K in a CD and 1K in stock and each
> earned 5% to give you a balance of 2.1K, you should be able to withdraw 2K
> without penalty, if the account is vested. Again you should verify, this
> is just my understanding.
>
only the earnings are penalized
10% then taxed at whatever my tax rate is (25% for '06)
Mike
> In article <46577834$0$4638$4c36...@roadrunner.com>,
> "Jerry" <nospam@???> wrote:
>
>> In other words say you deposited 1K in a CD and 1K in stock and each
>> earned
>> 5% to give you a balance of 2.1K, you should be able to withdraw 2K
>> without
>> penalty, if the account is vested. Again you should verify, this is just
>> my
>> understanding.
>
> Doesn't make sense to me either. Are you talking about investments in
> the ROTH IRA. Then yes, if you contribute 2K to the ROTH and then
> invest 1K into a CD and 1K into stock, you can withdraw up to the 2K
> contribution without penalty. It is the earnings that are subject to
> penalty.
>
> There are "ordered rules" for withdrawing from a ROTH. They are:
> 1) Regular Contributions.
> 2) Conversion contributions. (conversions from a traditional IRA etc)
> 3) Earnings on contributions.
>
> However, the OP's CD is not presently in an IRA of any kind, so I am
> still not quite how what you said applies to his situation.
For '07 I'd like to contribute $5K to a ROTH acct, then I'll buy another $5K
cd or invest it in something.
If I need the $5K, for say an emergency, I believe I can withdraw it the $5K
without penalty and will be penalized 10% + taxed at the going rate on any
earning if I withdraw them early?
Mike
I think it's worse than that because I'm divorced and only me as a dependent
Ernie Klein
Then for filing single, the numbers drop to $99K (start phase out) and
$114K (max).
If you are over that -- well, sorry about that (but not much :-)
[Earning too much to contribute to a ROTH is a nice position to be in]
You can still contribute to a traditional IRA instead of a ROTH. While
you will have to pay the tax when you take a distribution, by that time
you _might_ be in a lower bracket, and if not, your investment might
grow faster in a tax deferred account.
Again, don't go by what is posted here -- read Pub 590 and apply it to
_your_ situation.
--
-Ernie-
Mike
I'm vested in my employer's retirement plan and contribute to an optional
401K. I'm weary of tax hits that sem to get worse every year and I've
believed for sometime that all of us are facing huge tax increases in a few
years that are going to literally cripple the country what w/ trade
deficits, federal budget deficits, SS imploding, collapsing health care.
The ROTH was an attempt to sock away some protected money.
Ernie Klein
wrote:
> "Ernie Klein" <eck...@pacbell.net> wrote in message
> news:ecklein-BEFA79...@news.newsguy.com...
> > In article <uFL5i.51$eO5.30@trndny08>, "Mike" <12...@yahoo.com> wrote:
> >
> > You can still contribute to a traditional IRA instead of a ROTH. While
> > you will have to pay the tax when you take a distribution, by that time
> > you _might_ be in a lower bracket, and if not, your investment might
> > grow faster in a tax deferred account.
>
> I'm vested in my employer's retirement plan and contribute to an optional
> 401K. I'm weary of tax hits that sem to get worse every year and I've
> believed for sometime that all of us are facing huge tax increases in a few
> years that are going to literally cripple the country what w/ trade
> deficits, federal budget deficits, SS imploding, collapsing health care.
> The ROTH was an attempt to sock away some protected money.
Since you are covered by an employers retirement plan you are also NOT
eligible to contribute BEFORE tax money to a traditional IRA (and get a
tax deduction for doing so), but you can still contribute AFTER tax
money. For your purposes there is very little difference between a ROTH
and traditional IRA when you invest after tax money in both, except for
the required minimum distributions starting at 70 1/2.
If your income drops you could roll the traditional into a ROTH
(convert) by paying the tax on the earnings at that time (the after tax
contributions roll over without being taxed again).
--
-Ernie-