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Trying to get this straight....


Guest msdossys
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Guest msdossys

OK been reading like crazy about a Roth, but no one really spells out this "tax-free" earnings thing (I haven't flipped through Pub 590 yet). Now lets say I put $2000 in a Roth, and buy 100 shares of XYZ Corp at $20 per share. 10 years down the road, XYZ is trading at $60. Assuming I have made no other contributions, my Roth is now worth $6000 ($2000 Contrib, $4000 earnings). Lets also assume I am over 59 1/2 now. Can I sell my 100 shares of XYZ, and close the Roth, and get $6000 tax free? No paying capital gains? Seems like the IRS would want a piece of those capital gains...

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You got it right. The IRS got tax on your contributions by the fact that you cannot deduct them when you contributed them (they are after-tax dollars), and they won't double tax them upon withdrawal. The earnings also come to you tax-free. that's the government trying to incentivize people to save for their retirement.

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Guest allancoleman

Yes , msdossys , your $6000 is , in fact , taxfree . And there is NO RMD at age 70 . Plus you can pass your Roth on to your heirs entirely taxfree too . You can see why I'm a big fan of Roths and am on a Roth conversion strategy to convert some of my deferred accounts ( 401(k) - IRAs ) to Roths every tax year .

IRS Publication 590 is your Roth and IRA bible . The latest isuue out now is for the 2006 tax year . And , yes , you're right , the IRS probably does want a piece of those capital gains on Roths , but haven't figured out how to pass the legislation yet . :)

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Call me cynical, but I am of belief that eventually they will tax some Roth distributions. After the Greenspan Commission report in 1983, Social Security became subject to income tax. This was done to prevent huge deficits and aid the social security crisis. What makes you thing they won't do the same to the Roth 20 or 30 years from now. Congress will see millions to billions of untaxed dollars and simply change the rules. They do it all the time.

JanetM CPA, MBA

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Guest allancoleman

I DON'T have the IRS publication 590 site link for 2006 yet , which is why I didn't post it , jevd . My understanding among IRS watchers is the IRS is being PURPOSELY late in publishing anymore because they want to encourage folks to NOT wait for publications before filing and to do so , file , online sooner rather than later . ? ?

For myself , I just use the IRS publications more as a reference guide and planning tool durning the year and don't mind waiting . I find it very interesting to read IRS publications to look for errors in their own publications . :)

And I have the same concerns you do , JanetM . However , IF they do decide to tax Roth distributions later , I'm hoping they'll grandfather in the old Roths , which is why I'm taking advantage of Roth conversions every single tax calendar year since they were first allowed and will continue to do so IF it makes financial sense until ALL my deferred accounts are depleted . NOTHING beats TAXFREE .

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That certainly doesn't help us in the industry any when we need to refer someone to a publication and its out of date.

How many times do you hear "Where does it say that in plain language"?

JEVD

Making the complex understandable.

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Guest allancoleman

I agree with you , jevd . And you sound like some many other very knowledgeable posters here on this board , a tax professional . Fortunately , I'm just do my own taxes with TurboTax for years now and do really enjoy reading IRS publications . Not for business like you have to do , but just for fun to see what all us guys have to tolerate to get our taxes done . :blink: . And to attempt to take advantage of our rights to pay as little as we can under the law .

And I'm serious when I said I've heard on more than one board that the IRS is suspected to purposely delay future IRS publications to force folks to file online sooner rather than later . :angry:

For plain english in plain language , I've always liked the Nolo Press publications . Only problem , as you well know , the IRS will only accept the regulation explained in their own publications . But AFTER reading a Nolo explanation , I've found it much easier to go back to the IRS publication to find the same regulation .

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I like what JanetM pointed out. Social Security Benefits are very much like having your social security taxes (that you paid) returned to you. Were those FICA taxes deductible from your gross pay to lower your taxable income? No. The payment of your Social Security Benefit is much like having your own FICA payments returned to your hands - and that is taxable income. That's already double taxation.

If Congress adopts a consumption tax or national sales tax (or something like that) then the Roth contributions, having been taxed once, would get taxed again when the funds are used to buy something. Until then, or until Roth acounts or distributions are taxed as Janet mentions, Roth away!

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Congress can change the rules at any time and the Roth rules have already been changed.

BUT... it is highly unlikely that Congress will attempt to tax Roths directly for the following reasons:

1. Millions of folks own Roths and they vote.

2. A change would be a major renege and invite a popular revolt against the elected.

3. Grandfather option is easier - just change rules for future.

I agree that the US must strive to keep its financial affairs in balance. We can't just deficit spend or over promise on social security or other entitlements.

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J4 - I don't think anyone is talking about 1/2 the population not paying taxes. Frankly, some of the discussion when the Roth was created was aimed at weaning households from relying upon social security. Due to changes in demographics and life spans, SS doesn't work with 2 workers for 1 retired. The trend I see is more of the "You are in charge", with 401k, ESOP, and Roths all moving towards more self-reliant financial planning. More portability of pensions - faster vesting schedules. Etc.

With regards to the taxation of Roth conversions, I think there is a significant body of legal precendent that supports that you already paid your taxes and therefore should not be taxed again. The notion that Roth converters are not paying taxes is phoney. They elected to prepay their taxes.

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John G,

There were big stinks when Social Security became taxable, when the deduction for credit card interest went away, when the AMT started hitting middle class folks. Congress will one day see the huge pile of untaxable money and change the rules to get some of it.

Like I said earlier, I am cynical.

JanetM CPA, MBA

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Income taxes: If I read this right, 96.70% of all income taxes (2004) were paid by 50% of income tax payers.

If it were me, I would make an adjustment based on the share of adjusted gross income for each category.

...but then again, What Do I Know?

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Well, the data is sampling data only, any adjustment would still be an estimate. They state "All figures are estimates based on samples".

The addition of this link is only to strengthen the statement from earlier that "at some time, if ever, if more than 50% of the voters are no longer required to pay taxes (or very little tax at all), then we may be surprised how eager many in Congress will be to raise taxes on those who are still paying taxes (to get the votes from the nontaxpaying voter block)." Hypothetically, that is.

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The data supports the statement, whereas the need for the adjustment is based on the significant difference in results after the adjustment.

Thus, the data, even if adjusted, will still be strong enough to support the same argument, thus it's supportive without adjustment. I guess I would not bother making minor adjustments to these estimated numbers for time sake unless I can see that adjustment will result in a significant change. Enough to say - oh, that will be a lot different. From my first glance, I did not see that an adjustment would be a very significant change. Perhaps my first glance was not very good, and you believe the adjustment would be significant enough to raise the eyebrows?

If you think it would, what adjustment formula do you propose, or how much different would you think the results will be based on the adjustment?

I see $27,418,000 / $831,890,000 = 3.30%. This must not mean what I think it means - who can help me on this?

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My comment about the adjustment was not meant to refute your argument. Essentially, I would be more interested in the average tax rate rather than the income tax share, and you would probably argue that the average tax rate also supports your assertion.

I appreciate your explanation about insignificant adjustments and can understand your logic.

Although I have no empirical evidence with respect to your premise, one major reason why I would disagree with your statement, is that at least a portion of the non-taxed 50% (poorer group) would not support a tax-increase on the other 50% (richer group) because they hope to realize the American dream and become a part of the other 50% (richer group). Others might be opposed to tax increase on principal only. Finally with respect to Roth taxation only, it would require that only the "other 50%" have Roth accounts.

...but then again, What Do I Know?

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As moderator, I have closed this message thread.

As some lawyers might say, the original question was "asked and answered". A range of opinions were voiced.

We are now spiralling into the vague areas of future public policy, statistical analysis of taxes, and voter responses to actions yet to be taken. I think we have gone "off topic" enough to merit ending this thread.

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