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2010 tax changes
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| But I didn't really answer the question |
| posted by: camdolphin |
14:57 1.15.10 |
I'm ticked off b/c anyone with the most rudimentary understanding of the tax system would know that this is a gift to the rich and nothing else - only those making over $110k (or $160k) a year benefit b/c everyone else already benefits from the ROTH. It's hard to justify as having any kind of stimulus effect like a personal tax rate cut would have because it's geared to increasing long-term savings and sheltering appreciation from taxation many years hence. It also has all the inefficiencies of a tax shelter as people open ROTH IRAs, convert, and then re-open traditional IRAs (because you still can't contribute to a ROTH if you are rich).
I'd rather Bush just reduced the marginal tax rate another point for the rich (and I hated those tax cuts). But everyone would have noticed that. By monkeying with the ROTH, you can gift the rich without the public giving a crap. Nothing says boring like "traditional IRA conversion." My cabinet would have history's sexiest treasury secretary. Then maybe people would tune in.
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| Because |
| posted by: camdolphin |
14:50 1.15.10 |
401(k) accounts are geared for retirement. They must be used for retirement - you must start draining them when you reach 70 years old. They are taxable later (including appreciation) so even if you get a break now, we're guaranteeing an income stream later. And if you become broke in the meantime, you'll be taxed at a lower level later, which is fair. If you're still rich, you'll likely be taxed quite a bit on your 401(k) distributions.
ROTH IRAs are different. You don't have to withdraw from them ever; you can save them to pass on to your heirs tax free. Regardless how much they appreciate, the treasury will never get a cent from them. You don't have to use them solely for retirement; at age 55 you can withdraw for any reason and still get the tax shelter.
And this is not an insignificant benefit - although the cap on contributions is $5k/year, you can now convert the entirety of your IRA into a ROTH no matter how large it is. |
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| cam... |
| posted by: horsebeater |
11:46 1.15.10 |
... i don't see any difference between hating this tax law and hating 401(k)'s in general. the argument is basically that, because the rich earn more, they "benefit" more by tax shelters for retirement funds. this is always true.
this expands the tax break to some extent, but its the same KIND of tax break that's been around for decades
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| Non-deductible IRA contributions |
| posted by: camdolphin |
18:57 1.12.10 |
I was wrong earlier about being able to contribute more than $5k a year to an IRA if it's non-deductible (I think). Non-deductible IRA contributions are limited to $5k and only give you tax-deferred growth. The only people who make non-deductible contributions are those who make too much money to deduct the contributions or open a Roth IRA. The idea being that poor people need help saving for retirement, so we'll give them an incentive to save for retirement by making contributions deductible (traditional IRA) or giving them every penny of growth back tax-free (Roth IRA). Rich people should have assets to support their retirement and their heirs should not benefit from a tax shelter that would allow rich people to grow money tax-free until death.
Thanks to Bush (and the stock market implosion), all rich people who make too much money to deduct their contributions/open a Roth IRA can now convert to a Roth. That means because their contributions to their IRAs were nondeductible, they will only owe taxes on the appreciation of their retirement assets, not the principle (and thanks to the housing implosion, the appreciation will be less). Then the assets will grow tax-free for perpetuity.
Why? Why were the rich handed basically a tax shelter to "save for retirement"? The only thing I can think of is a complicated distinction between taxes on IRA distributions at retirement (taxed at the ordinary individual rate) and the taxes on capital gains. but that doesn't really make sense. A blatent new tax shelter for the wealthy. |
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| this is a good idea... |
| posted by: horsebeater |
17:40 11.3.08 |
... a really good idea for most people (even if you predict that tax rates will stay the same).
But I spent 10 minutes at www.money-zine.com and I think I got dummer. |
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| Not just for Horsebeater |
| posted by: camdolphin |
22:33 9.29.08 |
It escaped me when it was passed, but apparently one of Bush's 2006 tax code changes was to open a window in 2010 when everyone, regardless of income, can convert a traditional ira (which has pre-tax dollars) into a roth ira (which has post-tax dollars). Basically, when you contribute to a regular IRA, you deduct it from your income but then pay taxes on the whole shebang when you retire and take money out. So we lose a little revenue now (you're limited to deducting $5k a year) but will get to tax that money in the future, after it has grown tax-free.
In 2010, everyone can convert IRAs to a ROTH. You just have to pay the tax now, and then you have a pot of money that can grow tax-free and never be taxed. One big benefit is that, given our national debt, I'm quite sure tax rates will be much higher in the future. So you can hedge against that by paying the taxes now.
In addition, non-deductable contributions to a traditional IRA (up till now, I didn't know you could do that) can also be converted to a roth in 2010 - meaning that richies can put more money than the $5k in a traditional IRA and then convert it to a roth in 2010 so it can grow tax-free and never be taxed.
If this doesn't make sense, see here:
http://www.money-zine.com/Financial-Planning/Retirement/2010-Roth-IRA-Conversions/
The upshot is that every financial advisor in the country is telling rich people to put money in IRAs now so they can convert it to a Roth in 2010 - it makes sense for most people (especially if you have money in a 401(k) or pension plan that will be taxed upon retirement, it's a way to have both taxable and non-taxable funds). So the government stands to get a one-time influx of tax revenue in 2011 - money that we were supposed to get when working people retired later. I haven't heard any plans about what to do with this money - if it's not earmarked solely to either pay down debt or shore up social security, it's going to be a huge mistake. |
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