ERICOPOLY

Next up, somebody will propose mark-to-market accounting annually on all assets. Elimination of deferral of capital gains. Taxes due each year if your assets have appreciated. Really an IRA is a just a tax-deferral vehicle. So if Obama's goal is to eliminate tax-deferral, then all is fair in love and war. And if he is not against tax deferral, but merely just wants big IRA money to be hit annually on the realized capital gains, dividends, and interest, then this won't be hard for him to implement. You just need a second type of IRA account called the "SweepIRA" account. That account is one where taxes are due on dividends, interest, and realized capital gains. But there would still be the penalty for early withdrawal before 59.5. So that's the account where I would buy stocks like Berkshire and sit on them. Whenever the assets in the main IRA account exceed $3 at year's end, the excess gets transferred to the "SweepIRA" account.

Isn't most of Buffet's gains going to charity? That's true in his case today, and I don't want the government to get Bill & Melinda's foundation gift. However if he changes his mind and chooses to keep it all for his family, that tax would be forgiven. He hasn't yet given it all even though it sounds like a foregone conclusion. But if you go down the list on the giving pledge, there are a lot of folks on there who will get their capital gains tax free (on the money that isn't being given). And then of course there's everyone who isn't giving at all. You don't really know what's going to become of my RothIRA in the end -- maybe I too will be leaving it all the charity. Buffett didn't decide to announce his giveaway plan until twice my age. He wanted to compound it before giving. So taking a swipe at my money today... isn't that the same thing as taking a swipe at Buffett when he was younger? So the charity argument you are right about in Buffett's case, but people die all the time with large amounts of capital gains that are forgiven.

I find it interesting that the free step-up in cost basis isn't being attacked first. Buffett has like $40+b in unrealized capital gains on his Berkshire stock -- it will all be tax-free capital gains when he dies. At the new 20% capital gains tax rate + Obamacare surtax that's practically the entire $9b right there. So instead, they go after people with $3+m accounts that haven't yet seen them through the rest of their lives. Will $3m be enough if I live to beyond 100 years?

I'm not arguing you like you like the discussion you had with the other fellow, but one of my best friends is an estate planning attorney and some of it has rubbed off. I also have a trust (though not as large as yours) and have spent some time researching the topic...i find it kind of interesting. So, i'm trying to understand your thinking here. Regardless of what vehicle you choose, roth ira, traditional ira, regular brokerage...if you are over the estate tax exemption limit then you owe estate taxes on those assets. The Roth IRA is subject to federal estate tax just like any other asset held at death. Assets used to pay tax on a conversion to a Roth IRA reduce the owner’s taxable estate. Perhaps you are just talking about if the proposal passes, which changes everything in your circumstance, being over $3 million in an IRA. Then, yes, that would change your specific circumstance...since you paid the conversion tax upfront (and don't have that money paid for conversion compounding anymore). And further, you would not have it grow tax free anymore in its entirety if the IRA is is over $3 million. And on top of that you would pay estate taxes over the exemption limit (but estate taxes would be the case regardless of conversion or whatever vehicle the assets are in). For most people that never attain $3 million in Roth IRA assets, and IF the terms don't change again at some point in the future, then the Roth IRA is brilliant. Also, by naming a trust as the beneficiary, it will bypass your estate. But it will still be subject to estate taxes (just like a traditional or any other asset type) if you are over the $10.5 million exemption, if married and have an AB trust. Given your large asset base you might consider setting up an ILIT as well, and as you already mentioned a Crummey Trust would be beneficial. What you say is all true. I didn't explain myself clearly enough to be understood. Today, I'm in "somewhat" of a pinch because we have just enough taxable brokerage assets to both purchase a home and carry ourselves until we reach 59.5. So we need every penny we have and can't gift any to the children. Now, if my entire net worth were in my taxable brokerage, then I could easily afford to give them $1m for the Crummy Trusts, and my wife could do the same (I think). So we can gift them that amount upfront without triggering gift taxes, and then on top of that we can gift them each about $26,000 per year. We have two kids. Now, in 50 years that $1m (from each of us) and that $26,000 per year (from each of us) will be worth potentially a hell of a lot. And it will be growing outside of our taxable estates. So all the gains on those gifts made today would completely avoid the estate tax, even though the trusts would be paying taxes on gains along the way (if any gains... I might allocate assets to things like Berkshire that are tax-efficient). Instead, the money grows in my RothIRA where we'll get slaughtered on estate taxes -- 45% tax rate or something and it could easily be much higher in the future. The RothIRA eliminates some taxes, but it opens for me this humongous can of worms called the estate tax. Plus, look up GRATs (Grantor Retained Annuity Trusts). They are a vehicle where you can shove all of your assets during market bottoms and where all the gains in the next year or two pass on to your heirs estate-tax free (the appreciation happens outside of the estate). But then you get back all the money you put in (except for the gains!). You can't take advantage of GRATs with RothIRAs.

The thing is, I only converted the IRA to Roth IRA a few years ago -- literally I finished completing it in 2010. I have unrealized gains in the account right now. Those are tax-free normally if I suddenly die. Instead if I die right now, they get taxed as income. So instead of being completely tax free (from the step-up in basis), they become taxed at the worst possible rate -- income tax rate. Plus the gains I've made in the account and actually have realized in the days since conversion, those would normally have been taxed at low dividend tax rates and reduced capital gains tax rate. Instead, now they all get taxed as income. So it's really, really crappy. Normally for example people in a divorce can split assets without being assessed taxes for unrealized gains -- not with a RothIRA, it all gets assessed as income tax even if you were to remove appreciated assets in-kind (without selling them). Then of course while you think this is a great tax shelter, and generally it is, once your RothIRA gets really big it sort of starts to become fair again. My taxable estate is now high enough to trigger estate taxes (8 figures). I can't move any of the RothIRA assets into a trust where they would appreciate outside of my taxable estate. So any gains I make there going forward are going to be fully hit by estate taxes, unless I leave the country. Anything I try to gift early to my children would be hit with the early withdrawal penalty as well as income tax. So that's something people don't realize -- RothIRAs aren't quite as tax-free as they look considering that you wind up paying that massive estate tax rate that you could otherwise avoid. And if that tax rate is 45%, then I will reiterate my belief that these are not the 100% tax credit vehicles that you claim them to be -- because I'm now paying a 45% estate tax on the RothIRA assets, whereas instead people typically grow the money in a taxable account outside of their taxable estate (for example, in a trust). now, Obama will wind up being penny-wise and pound-foolish if he never sees those estate taxes. I'm not bluffing -- the deciding factor of winding up moving to California last year instead of Australia was the RothIRA issue where Australia was planning to tax it as an offshore trust (taxing gains every year as if they were withdrawn from the account). So we're not held back by anything now -- I'm an Australian dual citizen and was quite serious last year about leaving. The future estate taxes, the money I spend to fund my living in the US economy -- buh bye. First, we need to get the kids through Montecito Union Elementary School which we're now committed to. So about 7 more years here first.

Absolutely. You're right. Let me change my quote to- "Basically you may get screwed" Okay, now you are a tease. :) I completely understand your frustration. I would be just as peeved if i were in your shoes and this proposal passes, having just made the a Roth conversion. Austerity isn't fun. Right , but I already paid the liability upfront vs in 40 years. I did my part for cash flow. Why not assess a tax on unrealized gains for Buffet who is with $ 40 + billion in unrealized gains and nearer the grave when it ALL!!! Goes tax free!!! Plus he advocates for billionaires to pay more whereas the step up in basis was originally to eliminate the cost of paperwork hassles for heirs of the average Joe.

Absolutely. You're right. Let me change my quote to- "Basically you may get screwed" Okay, now you are a tease.

By no less than the same person only 3 years later. Sounds deliberate if you were into conspiracies. So if I get too pissed I just go to Australia and y'all lose out on maybe tens if not hundreds of millions in inheritance taxes. My grandfather risked his life for that country, as did my great-grandfather and his 3 brothers were killed in Gallipolli and France. I owe nothing to this country if they fuck me. Fuck them in return.

To put it differently, I made a wager with the government. They wanted the tax on my IRA paid in 2010 so badly, that they agreed to give me a deal. If I paid the taxes in 2010, they'd consider it payment in full for all future tax liability. That benefits them because a dollar today in times of crisis is worth more than a dollar in 40 years when many of today's taxpayers (otherwise footing the bill) would be dead. The bet they made is that my RothIRA would grow at just an average rate. And averaged across all accounts in the population, that is probably true. Now they are selectively reneging on that bet and just the very select few who did far better than average now will be taken a second tax swipe at. So not only did they get their tax bill early, they are now depriving me of the future returns on that tax bill. Thus I'm damaged by their reneging on the deal. Had I just refused the offer to do the conversion, no less than 3 years ago, I would be bitching a lot less because I could have invested that tax bill in things like BAC to help pay the tax due on the gains the account has made since then. So, a lesson in doing business with the government. Only 3 years ago they lifted the income restrictions on RothIRA conversions! The wanted us to do this conversion in the post-crisis, post-bailout world. Now, bait and switch.

First, you write: I've explained the tax paid at conversion was recapture on a deduction you already took. Let me explain: The account was originally all IRA. Then it was converted to Roth IRA. This is the order of operations argument: I paid 35% tax at conversion, but all other things being equal it would have been a 35% tax later on. Normally people say that's a wash -- due to the order of operations. You withdraw money from the account early to pay the tax at conversion. This money would have grown at the speed of the account otherwise and would have been there to settle the account bill in full at a later date had I never done the Roth conversion. However the way I did mine is instead of withdrawing money from the account to settle the conversion bill, I kept it all in there and used my already-taxed money to pay the bill. Most people though don't do it that way and they withdraw a little from the IRA to cover the conversion tax. So that's why your argument isn't valid -- I took the added risk of potentially being taxed yet again if I die early or go through divorce. Not only taxed twice (killing the order of operations argument), but also losing other things like the step-up in basis. The growth of the tax paid would not have been stunted by early tax bill settlement. So the guy with a Regular IRA who never paid any of the tax bill early is the one you are talking about -- he is not being taxed twice. But the RothIRA guy, following the order of operations argument, merely payed the entire tax bill upfront rather than later. And now he gets taxed a second time if you die early, get divorced, or if Obama makes you withdraw the gains early because it exceeds $3m. Then you write: I guess you are conceding by changing the subject? Oh, yeah, like talking about the risks of the RothIRA is changing the subject when you want to keep the topic about "100%" tax credit certainties right? Well, your 100% tax credit certainty is a straw man that I'm battling with. It's a myth -- there are no certainties. I try to explain that to you and you are claiming foul. You weren't even aware of those death & divorce rules, and that's why you were "100% certain". There isn't any 100% certainty. There's just the rules as they are, and there's trying to explain them to you. Still waiting for a reasonable argument against what I actually wrote. You claim to only be discussing RothIRA. Given that, we can stop talking about the water under the bridge. The supposed tax bill that should have been paid in the beginning was on the pre-tax contribution to the IRA. Later I rolled to the RothIRA. We can go back to talking about IRA's if you want, but as for the RothIRA, I settled that tax bill at conversion. Had I kept it in the IRA instead of the conversion, then I wouldn't be getting pinched for extra tax relative to the guy with the Regular IRA who never did the conversion. So that's where you're wrong. By keeping the argument only about RothIRA, you then claim I can't talk about regular IRAs but ignore that what you are advocating for is an additional tax that the Regular IRA payer isn't paying. And that's the guy who took the initial tax break by putting pre-tax income into the account.

They won't pay a penalty That's semantics. The "penalty" in the words of the law, is the 10% "early withdrawal" penalty. In reality, the money was withdrawn early from the IRA to pay the conversion tax. That money didn't then compound at the rate of the account going forward, enjoying tax-deferral along the way. Then when you get divorced and you are forced with withdraw "gains" in order to pay off your wife, you are taxed on those gains as regular income (but not assessed the 10% extra penalty). The trouble is that the tax bill you paid before was frozen in time. So the real-world penalty you pay is that you now owe income tax on your gains but you paid your tax bill early so those monies now don't cover the gains that the account has made since the conversion. So you lose out. Now, had you never converted the IRA to a Roth IRA in the first place, then everything would be hunky dory. Your money (had you chosen to do the Roth Conversion but didn't) would have compounded along with the IRA account. So it's a gamble. If you are 100% certain that you'll live beyond 59.5 and/or won't get divorced, then that's great! You win by going with the Roth IRA even if tax rates don't change. So the RothIRA is no sure path to victory. Government wins by getting your tax dollars early (time value of money) to solve today's problems. In exchange, they offer you some sort of reward if you make it to 59.5 without death or divorce. Plus, they offer certainty of tax rate paid. In exchange, they switch the deal completely after the ink is dry. And I did that conversion, what, like just 3 years ago? During Obama's presidency, no less? After the financial crisis, no less? Had I never done the IRA/RothIRA I could have been putting money into things like GRATS (when BofA was at $5) and into Crummy Trusts. Thus, I could have been reducing my future estate tax bill. That other dense guy doesn't get it because he doesn't see things in anything other than a vacuum. The big picture shows that the RothIRA or IRA is a massive trap that keeps you from reducing your taxable estate. You can't put RothIRA into a trust. You can't! You can assign a trust to be a beneficiary, but the trust doesn't get the money until after the estate tax is paid. So what will estate taxes be when I die? 50%? Who knows. The RothIRA is hardly 100% certain of credits -- only in a vacuum. Straw man all the way.

First, you write: I've explained the tax paid at conversion was recapture on a deduction you already took. Let me explain: The account was originally all IRA. Then it was converted to Roth IRA. This is the order of operations argument: I paid 35% tax at conversion, but all other things being equal it would have been a 35% tax later on. Normally people say that's a wash -- due to the order of operations. You withdraw money from the account early to pay the tax at conversion. This money would have grown at the speed of the account otherwise and would have been there to settle the account bill in full at a later date had I never done the Roth conversion. However the way I did mine is instead of withdrawing money from the account to settle the conversion bill, I kept it all in there and used my already-taxed money to pay the bill. Most people though don't do it that way and they withdraw a little from the IRA to cover the conversion tax. So that's why your argument isn't valid -- I took the added risk of potentially being taxed yet again if I die early or go through divorce. Not only taxed twice (killing the order of operations argument), but also losing other things like the step-up in basis. The growth of the tax paid would not have been stunted by early tax bill settlement. So the guy with a Regular IRA who never paid any of the tax bill early is the one you are talking about -- he is not being taxed twice. But the RothIRA guy, following the order of operations argument, merely payed the entire tax bill upfront rather than later. And now he gets taxed a second time if you die early, get divorced, or if Obama makes you withdraw the gains early because it exceeds $3m. Then you write: I guess you are conceding by changing the subject? Oh, yeah, like talking about the risks of the RothIRA is changing the subject when you want to keep the topic about "100%" tax credit certainties right? Well, your 100% tax credit certainty is a straw man that I'm battling with. It's a myth -- there are no certainties. I try to explain that to you and you are claiming foul. You weren't even aware of those death & divorce rules, and that's why you were "100% certain". There isn't any 100% certainty. There's just the rules as they are, and there's trying to explain them to you.

The whole reason why I'm fearing that they'll tax me a second time on these gains currently in the account is because of the rules regarding how they do early distributions for divorce and for early death. You get hit for any taxes on residual earnings as if it were a regular IRA. This despite the fact that you already did the conversion tax! So if they have those double taxation rules already, I won't put it past them to try it again.

You claimed it was a 100% tax credit as if they were 100% a result of the account and that tax credits were solely due to the account as if not partially available otherwise -- such as the 100% step-up in basis. I pointed out that you can get a full tax credit on unrealized gains when you die. You could also have been paying just 15% capital gains tax and 15% dividends tax over the past 10 years. Vs the IRA which gets no such tax relieve -- it's all taxed in the end at the regular income tax rate. Which may be 35% in the future or it may very well be 70%. So by no way is the IRA the 100% free-ride that you describe. If the future income tax rate is indeed 70%, then the IRA account holders might just be losing big time when instead they could be paying just 15% or 20% tax on capital gains and dividends. And paying full income tax on unrealized capital gains when you die, versus getting the automatic step-up in basis. You totally exaggerated the impact of these accounts. They may or may not be better, depending on future circumstances of unrealized gains when you die, dividend and capital gains taxes along the way, and the eventual income tax rate when the funds are eventually taxed. My claim was VERY SPECIFIC to SouthernYankee's post. Which was about ROTH IRA's. I stated: This is a fact. I did not state anything about unrealized gains. What you are doing is a) pointing out the obvious b) straw manning me. Stop it. I fully aware of the effect marginal tax rates play on deductible and non-deductible savings account. It can work in your favour or against it. You very conveniently keep glossing over the point though that in either case you are still better off than having neither option available to you if you have investment income. I'm only talking about RothIRAs. That's why I've told you more than once about the risk of the RothIRA -- you have divorce risk and you have death risk. If either happens before age 59.5, then tax is paid twice on any earnings in the account that accrued after the RothIRA conversion was done. From your tone I don't even think you recognize this risk or you're dancing around it. Stop ignoring it.

What you are missing is that the gains in the RothIRA are tax-free only if you live beyond 59.5. Otherwise, it's all taxable income. The tax paid out on the initial conversion would have kept on growing and growing. That growth would have covered much of the taxes eventually due on the future account growth. Now, those taxes are never due if I die after age 59.5. Divorce is another big risk. What if I get divorced and my wife takes 1/2 of my RothIRA assets before I'm 59.5 years old? Any earnings taken from the account and transferred to her account is taxed. So you see, hardly the free ride you speak of. By losing the time value of money between now and 59.5, and growing it at roughly the same speed at the RothIRA (aside from tax friction), then I effectively suffer the tax consequences if I neither stay married until 59.5 or if I die before then. I would have both largely paid the future value of those taxes, and then get assessed tax yet a second time for not being 59.5.

And is that all you held in the last 5 years? As Albert King once sang, "Everybody wants to go to heaven, nobody wants to die". This conversation isn't about my account. You made a generalization about everyone.

No, do the math. It all depends on marginal tax rates (as long as there are no penalties). If the rate is the same at deposit and withdrawal, non-deductible and deductible savings structures are the same. If the rate at deposit is higher than withdrawal, deductible savings structures are superior. If the rate at deposit is lower than withdrawal, non-deductible savings structures are superior. Not true at all. The money I paid in tax a few years ago has stopped growing because I already handed it over. Had i left it growing at the same speed as the Roth IRA it would be enough to cover the entire tax bill of the Roth IRA, no matter when I die. The trick is getting it to grow at the same speed as the RothIRA -- that's the only tax subsidy I'm getting. But I lose out big time if I die before 59.5 and all of the gains are due at one big whopping income tax rate. The money I set aside to pay the eventual tax bill was instead paid out when I did the Roth converstion. That money might have grown 5x or something by the time I die (perhaps to cover a substantial amount of the tax bill due). But instead, it isn't growing because it was already paid out. Thus, I'm taxed twice if I die early.

You claimed it was a 100% tax credit as if they were 100% a result of the account and that tax credits were solely due to the account as if not partially available otherwise -- such as the 100% step-up in basis. I pointed out that you can get a full tax credit on unrealized gains when you die. You could also have been paying just 15% capital gains tax and 15% dividends tax over the past 10 years. Vs the IRA which gets no such tax relieve -- it's all taxed in the end at the regular income tax rate. Which may be 35% in the future or it may very well be 70%. So by no way is the IRA the 100% free-ride that you describe. If the future income tax rate is indeed 70%, then the IRA account holders might just be losing big time when instead they could be paying just 15% or 20% tax on capital gains and dividends. And paying full income tax on unrealized capital gains when you die, versus getting the automatic step-up in basis. You totally exaggerated the impact of these accounts. They may or may not be better, depending on future circumstances of unrealized gains when you die, dividend and capital gains taxes along the way, and the eventual income tax rate when the funds are eventually taxed.

This article highlights the risks of the RothIRA well: http://www.rothiracalculator.org/early-withdrawal-penalty/ See, if I die today (before age 59.5), my heirs will owe income tax on all of the gains in the account. But they have less money to pay that tax with because, years ago, I paid a tax bill to convert the account to a RothIRA. Had I not done that, the tax bill from years past could have remained invested and it would be a much larger amount now (to help pay the tax bill on the Roth IRA). So the RothIRA may well be considerably worse deal for my heirs in the end -- depends if I die before I'm 59.5.

I see what you are saying, however you are making yet another mistake that makes you nothing close to 100% correct. You are assuming there was income or realized gains. There may not be either. Thus you can't claim 100% of anything. A person gets tax-deferral for holding Berkshire Hathaway stock and the tax is never due upon death. Not one penny of tax due. No dividends taxed, no capital gains tax. Nothing!

That's nearly 100% incorrect. But not entirely.. Remember basic math -- order of operations doesn't matter for multiplication. So you can pay tax today on $100,000 of IRA account conversion to RothIRA. Maybe that costs you $35,000 in total taxes paid at 35% rate. Now, if the Roth IRA account were to then compound at 10% per annum for 24 years, it would be worth about $1,000,000 in 24 years. So you could then withdraw it all tax-free. But remember that $35,000 tax bill you paid upfront? Well, what if you invested the $35,000 at a 10% compounding rate for 24 years? It would be worth not quite 10x because you had to pay taxes on realized gains and dividends along the way. But aside from that, at 10% growth rate it would be worth $350,000. So you see, the primary advantage a RothIRA has is that you tax obligation compounds tax free. There are other bells and whistles such as no forced age of withdrawals and that your heirs can inherit them... But you called it a 100% tax credit. Almost totally incorrect, but not quite... Plus, maybe Gingrich eventually wins and the income tax rate is only 10% in 24 years? In that case, you've already paid a 35% rate and you got screwed. They might go to a 10% flat tax and VAT system in the future. Or the tax rate of course could be 70%. But you just don't know. I took the gamble and paid the 35% rate.

I'm only 40 -- you can't withdraw until 59 1/2 or you get hit with penalties. They penalize me for taking money out of the tax shelter. I mean, talk about stupidity. If I'm really costing the taxpayers money then let me pull it all out penalty free instead of trying to encourage me not to.

The govt. backstopped the money in your account. There was no agreement for that either. You would have lost close to 100% of your money in your IRA account if the financial system collapsed. And they had to spend a huge amount of money for that. Now they want it back. That's not a claim you can make for all IRAs. Some people might have been invested in foreign stocks that were not at risk of collapse. If the financial system collapsed, everyone was at risk. The US dollar and the economy plays a foundational role in the world.Don't remember the days when we were waking up wondering if the number shown in our portfolios meant anything? Oh, rubbish. You could hold a foreign currency or shares in something that hoards physical gold (like what Sprott's physical gold fund does).

The govt. backstopped the money in your account. There was no agreement for that either. You would have lost close to 100% of your money in your IRA account if the financial system collapsed. And they had to spend a huge amount of money for that. Now they want it back. That's not a claim you can make for all IRAs. Some people might have been invested in foreign stocks that were not at risk of collapse.

The key takeaway is that I paid the tax bill upfront. That tax came out of my taxable account -- it was after-tax dollars. As long as I would have (instead) invested that money the same as my RothIRA, then it would be largely enough to pay the tax bill due on my RothIRA. So if they now force me to take an early withdrawal on my RothIRA for the amount exceeding $3m and tax me again on that, you ***** ****le Obama, that would be an entirely second tax on that income. Tax me once? Okay, that's fair. Twice? You go to ****. So hopefully this will be taken into account and excess to date will be withdrawn tax free and penalty free for Roth IRAs.