Letters to the Editor
To the Editors:
The title for Mark Gaudet’s article, “8 Years Later, Same Old Questions: Evaluating Roth IRAs,” in the September 2004 AAII Journal was really appropriate. Not much new information has been printed to help decide if the Roth conversion is advantageous.
I wanted a more qualitative assessment of the Roth conversion quandary, so after retirement I put together a program that allowed me to evaluate aftertax income for two cases—the first where a Roth conversion was made, and the second where no conversion was made. I evaluated several scenarios of choosing a fixed aftertax income and through an iterative process found the tax for both cases, and then monitored results over several years into the future. It was best to convert IRA funds over a several-year period to keep the tax down. In many cases, the Roth fell behind in the early years because the converted funds were in addition to income used for living and, thus, were often taxed at higher rates. If funds were kept in the Roth until absolutely necessary, the compound growth sometimes gave the Roth the upper hand.
In some instances, the Roth converted case won outright from the start. These cases occurred when Social Security income was high. Marginal tax rates increase above the tax bracket rate in the 15% and 25% brackets when greater than 50% of Social Security benefits are taxed. The marginal tax rate in some instances far exceeds the maximum tax bracket rate. When 85% of the Social Security benefits are taxed, the marginal rate drops to the tax bracket rate. The Roth conversion is sometimes advantageous when IRA withdrawals trigger a tax on Social Security benefits. Converting to a Roth could eliminate this excessively high tax in future years. Note that if the high marginal tax still exists after a Roth conversion, due to a pension or other income, the result would be quite different.
The important point to consider when contemplating a Roth conversion is not the tax bracket, but the marginal tax rate on the IRA withdrawals. Also, senior citizens should be aware of the marginal tax rates for the amount of Social Security benefits they receive. Although Social Security benefits increase each year with a cost of living adjustment, the IRS Social Security Benefits Worksheet (used for preparing tax returns) has not been adjusted for these increases. The result will be that more and more lower-income senior citizens will be taxed on greater than 50% of their Social Security benefits.
—Robert F. Lee
To the Editors:
To the Editors:
I read the article “Surviving a Loss: Financial Planning for Widows and Widowers,” by Mark Colgan in the August 2004 AAII Journal, and although it was most informative, I feel the most efficient way to handle financial planning is before the need arises. One option is living trusts. If these were established before death, most of the mentioned problems would be taken care of and the family could spend time grieving and not worrying about chaotic financial details.
To the Editors:
The June 2004 AAII Journal article on ways to save for college (529s, pre-paid plans, etc.) was excellent [“College Prep Guide: Planning and Saving for a Child’s Higher Education,” by Mark Gaudet]. I have three young children and have done much study on these plans offered by both my own state of Kentucky and other states. I have a couple of comments and some FYI to pass along based on my own research.
Most plans I’ve researched have fees and expense ratios that often aren’t mentioned. People who invest in the 529 or pre-paid programs should be aware of this and subtract out such expenses from the expected returns of the plans.
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Some states contract out the management of their programs. The state of Kentucky doesn’t manage its own pre-paid tuition program, it’s contracted out to a sub-contractor. The sub-contractor charges annual fees, and can raise them at their discretion at any time.
Anyone who reads the AAII Journal, or who is a member of AAII, can most likely make their money grow at a better rate (through other investment instruments), without too much effort, than most 529 and pre-paid tuition programs.
- Don’t forget about the political forces of some states. My own state’s governmental agenda is extremely political which makes for a bit of uneasiness about future changes to the pre-paid program.
In sum, the tax-deferral advantage of these plans is definitely a benefit, but it’s important to recognize the fees, and in some cases, the state politics, that come with the programs as extra baggage.