Obama to cap tax-preferred retirement accts to $3MM

[Otsog]

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  So hopefully this will be taken into account and excess to date will be withdrawn tax free and penalty free for Roth IRAs.

 

It would be absolutely ludicrous if they tried to tax the draws made to come inline if this became policy. 

 

Even if they were dumb enough to try for a grab like that why couldn't you just make the draws before it went into effect? 

 

There is no way they wouldn't allow a grace period to come inline with new rules.

[Guest valueInv]

The government isn't obligated to support mine.  I put the money in the account  The government put nothing into the account. 

 

I made a deal with the government where I agreed to pay my tax upfront for the Roth Conversion.  They agreed to it...

 

The arrangement is that if I then go on to lose 100% of the investment in the account, they keep my tax money -- I get no deduction or clawbacks for that.  So it's perhaps an even better deal for the government than for me in that regard -- depending on how things work out.

 

Some people really do lose money in their Roth IRAs.  But every now and then a person wins at the casino and walks out with a million dollars after putting only a dollar into the machine.

 

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?

[ERICOPOLY]

The government isn't obligated to support mine.  I put the money in the account  The government put nothing into the account. 

 

I made a deal with the government where I agreed to pay my tax upfront for the Roth Conversion.  They agreed to it...

 

The arrangement is that if I then go on to lose 100% of the investment in the account, they keep my tax money -- I get no deduction or clawbacks for that.  So it's perhaps an even better deal for the government than for me in that regard -- depending on how things work out.

 

Some people really do lose money in their Roth IRAs.  But every now and then a person wins at the casino and walks out with a million dollars after putting only a dollar into the machine.

 

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).

[rranjan]

 

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?

 

That's stretching the argument. One can even argue that government was responsible for whole mess. Anyway, that is useless point to discuss.

 

Simply said, Government should differentiate between post tax and pretax retirement vehicle. If you start taxing twice then it becomes ad hoc.

[Otsog]

Re: Obama to cap tax-preferred retirement accts to $3MM

« Reply #44 on: Today at 01:26:12 PM »Quote Quote from: SouthernYankee on Today at 01:24:20 PM

Re: Obama to cap tax-preferred retirement accts to $3MM

« Reply #25 on: Today at 11:56:10 AM »So, nothing... other than platitudes 

 

Kind of funny seeing a huge government hand-out program getting curtailed being attacked for being 'socialist'.

 

 

 

An individual setting aside their own money for their retirement is now considered a government hand out? Am I missing something here?

 

Yes you are.  The part where you get tax breaks for setting it aside in a certain fund approved by the government.

 

 

 

-I don't get any tax breaks. I made an agreement with the government that this money, which I already paid taxes on, if I put them into a certain type of account, which is not available for me to use until a certain age, will then be income which will not be taxed.

That is a lot different than getting a tax break, unless you believe that the money is the government's and not mine. If you believe that, I will not argue with you, because I will not be able to change your mind, whatever I say.

 

Cheers!

 

The US government taxes incomes.

 

The ROTH IRA provides a 100% tax credit to all income earned within the account if withdrawn after a certain age.

 

It is a MASSIVE tax break. 

 

If there is no tax break why are you using a ROTH IRA in the first place?

[ERICOPOLY]

Even if they were dumb enough to try for a grab like that why couldn't you just make the draws before it went into effect? 

 

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.

[Otsog]

Even if they were dumb enough to try for a grab like that why couldn't you just make the draws before it went into effect? 

 

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.

 

Ah yes.  The Canadian version doesn't have the age restrictions on withdrawals so that wouldn't be an option for you.

 

Still, there is no way people in excess of $3mill and under 59 1/2 wouldn't be accounted for in the transition.  There would be a grace period for withdrawals (or if the lobbyists are good enough a grandfathering of accounts already in excess that only stops future contributions and allows the current funds to stay). 

 

I think there is greater risk of Obama trying to overturn the 22nd Amendment than trying to pull the rug out from under you (while he is already stealing your lollipop).

 

 

[ERICOPOLY]

The ROTH IRA provides a 100% tax credit to all income earned within the account if withdrawn after a certain age.

 

It is a MASSIVE tax break. 

 

If there is no tax break why are you using a ROTH IRA in the first place?

 

 

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.

[Otsog]

The ROTH IRA doesn't care what your money went through before it ended up in it.  The second a dollar is inside the ROTH IRA all income earned on that dollar is 100% tax free as long as you follow the rules.  That is exactly what I said and it is 100% correct.

 

Your situation is a conversion from deductible IRA to a non-deductible IRA.  So the 35% is a recapture on a deduction you already took.

 

You are acting like that $100,000 is all yours free and clear except that it has major strings attached from that massive tax deduction you already took. 

 

 

 

 

 

[JBird]

I'm disappointed this cap is even being proposed.

 

I'm Eric's newest fan.

[ERICOPOLY]

The ROTH IRA doesn't care what your money went through before it ended up in it.  The second a dollar is inside the ROTH IRA all income earned on that dollar is 100% tax free as long as you follow the rules.  That is exactly what I said and it is 100% correct.

 

Your situation is a conversion from deductible IRA to a non-deductible IRA.  So the 35% is a recapture on a deduction you already took.

 

You are acting like that $100,000 is all yours free and clear except that it has major strings attached from that massive tax deduction you already took.

 

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!

[SouthernYankee]

Otsog,

 

Bottom line, as someone already commented, this is simply something put forward to please voters who are jealous of people with wealth, and will be swept under the bus at a later date. If our government does go forward with something like this, there will definitely be ways around it, as Ericopoly has already shown. This topic is better examined on a political blog.

 

Cheers.

[ERICOPOLY]

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.

 

[Otsog]

The ROTH IRA doesn't care what your money went through before it ended up in it.  The second a dollar is inside the ROTH IRA all income earned on that dollar is 100% tax free as long as you follow the rules.  That is exactly what I said and it is 100% correct.

 

Your situation is a conversion from deductible IRA to a non-deductible IRA.  So the 35% is a recapture on a deduction you already took.

 

You are acting like that $100,000 is all yours free and clear except that it has major strings attached from that massive tax deduction you already took.

 

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 is not a contradiction of what I said at all.

 

I'm not assuming there was income or realized gains.  I'm saying what happens to it if there is.

 

I put it in very simple terms.  At this point you are being intentionally obtuse.

 

IRA's, whether traditional or ROTH offer huge tax breaks on investment income.  That is what I stated, neither you or SouthernYankee have provided a shred of evidence to counter that.  Which you really can't because it is a factual point.

 

Holding BRK for 40 years is an absolutely spectacular way to accumulate wealth while having 0 investment income.  If you prefer to wait for only companies that resemble the exact characteristics of BRK where you have complete and unwavering faith in the management then yes, IRA's are unnecessary.  Best of luck in that endeavor.

[ERICOPOLY]

Holding BRK for 40 years is an absolutely spectacular way to accumulate wealth while having 0 investment income.  If you prefer to wait for only companies that resemble the exact characteristics of BRK where you have complete and unwavering faith in the management then yes, IRA's are unnecessary.  Best of luck in that endeavor.

 

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.

 

 

 

[Otsog]

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.

 

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.

 

 

[ERICOPOLY]

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.

 

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.

 

 

[Guest valueInv]

Oh, rubbish.  You could hold a foreign currency or shares in something that hoards physical gold (like what Sprott's physical gold fund does).

 

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".

[SouthernYankee]

Otsog,

I can't think of it as a tax break because the law allowed me to enter into an agreement with my Federal government, which said that I could put after-tax money, up to $5000 per year (I think that is the amount), into an account which can't be touched until I am a certain age, and when I do start to use that money, they (the Federal government), will not tax it. The money is not guaranteed, and if there are any losses in that account, I don't believe you could claim them on your tax return.

 

The money is mine, the government has already taxed it, to go beyond this point is, I'll say it again, a political discussion. I do not think they have a right to any of that money, be it the original amount, or any increase thru dividends, capital gains, etc.

 

Cheers.

[ERICOPOLY]

Oh, rubbish.  You could hold a foreign currency or shares in something that hoards physical gold (like what Sprott's physical gold fund does).

 

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.

 

[Otsog]

Holding BRK for 40 years is an absolutely spectacular way to accumulate wealth while having 0 investment income.  If you prefer to wait for only companies that resemble the exact characteristics of BRK where you have complete and unwavering faith in the management then yes, IRA's are unnecessary.  Best of luck in that endeavor.

 

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:

 

The ROTH IRA provides a 100% tax credit to all income earned within the account if withdrawn after a certain age.

 

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. 

 

 

[ERICOPOLY]

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.

 

 

[ERICOPOLY]

Holding BRK for 40 years is an absolutely spectacular way to accumulate wealth while having 0 investment income.  If you prefer to wait for only companies that resemble the exact characteristics of BRK where you have complete and unwavering faith in the management then yes, IRA's are unnecessary.  Best of luck in that endeavor.

 

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:

 

The ROTH IRA provides a 100% tax credit to all income earned within the account if withdrawn after a certain age.

 

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.

 

 

[ERICOPOLY]

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.

[onyx1]

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.

 

And once that is complete, its a very small step to a one-time wealth tax for all estates above an amount which is deemed "enough".