Investment showdown -- beyond the Roth, SDP, & TSP

[Butters]

Noonin, you have the aircraft. I am going to have the sexy stu bring me another Gin and Tonic. Oh, yes! I am on a domestic Delta flight and the 1st class flight attendant in not hard to look at. She is not Airman yummy britches, but she looks better than the United and AA hags.

ADDED: Bishop. You are out of your element. Stick to TSP and interest bearing checking accounts.

Edited October 18, 2012 by Butters

[Danny Noonin]

Noonin, you have the aircraft. I am going to have the sexy stu bring me another Gin and Tonic. Oh, yes! I am on a domestic Delta flight and the 1st class flight attendant in not hard to look at.

The stews we put in first class are all old hags, young gay dudes or trannys. If what you are looking at is not #1 or #2 then look out. Might not have that third drink or you could make a grave mistake.

[Bishop]

DN, I guess we have different meanings of the words advice, your personal experience mixed in with your take on a few of the items being thrown around comes off a lot like advice to me in some shape or form. Im not saying your telling us to go buy this stock and sell that fund, but your first hand account of being screwed over is advice enough for some of the people in here to possibly stop one from making a bad decision.

Butters, I'm not TSP eligible (no gov affiliation), if its all the same, Ill stick with my current format of investing (combing message boards for the next great stock tip!). Its working out very well for me in that I never have to worry about CG taxes because I never gain anything.

[Butters]

The stews we put in first class are all old hags, young gay dudes or trannys. If what you are looking at is not #1 or #2 then look out. Might not have that third drink or you could make a grave mistake.

Well, there are 3 in first today (757 ATL-SEA) #1 and #2 are in fact the gay dude and the old hag, #3 must be a replacement for someone who called in sick. I can spot a tranny from 4 inches away. Oh, fuck here she comes and I shit you not she is wearing a turtle neck. I think I need more drinks.

Break break. No worries bishop. I had a short term capital gains loss I carried over for several year. As a young dumb ass, I invested in an airline 10 years ago. Don't make the same mistake.

Joke: how do you make a small fortune in the airlines?

Take a large fortune and invest it in an airline.

[Danny Noonin]

DN, I guess we have different meanings of the words advice, your personal experience mixed in with your take on a few of the items being thrown around comes off a lot like advice to me in some shape or form.

For fuck's sake man. Do you seriously have to try and rebut every single thing anyone says? Knock it off.

Aren't you about to start UPT? If so you better fix your "blame everyone else" problem before you get there or you are in for a painful experience. Your instinct right now is to argue with folks who are trying to help you. Take our points for what they are worth (maybe nothing, maybe a lot) and then shut the flying fuck up.

I bet $100 you are right now thinking "I didn't mean to sound like I was rebutting, you just read it wrong"...which is evidence to my point.

Edited October 18, 2012 by Danny Noonin

[Bishop]

I guess you owe me $100. I do feel the need to respond to statements made towards me or about something I said. Not sure where you got the blame everyone else part from but alright.

Not sure where you got that I was going to start UPT anytime soon. That ship has sailed and I unfortunately was not on it, would of been nice though.

Edited October 18, 2012 by Bishop

[Danny Noonin]

Not sure where you got the blame everyone else part from but alright.

Really?

not sure why that is hard for you to understand, but go ahead and belittle me more because you didn't understand what I was saying.

If my post didn't make sense and you are willing to help me on the subject then maybe ask me to clarify what I asked, or at least tell me I would have better luck with an answer if my question dint look like a pile of crap.

I picked up on a smart ass remark so I replied back to him the same way.

it should be pretty clear to someone reading my question that I understood >1y=Short term, so it should be pretty obvious <1yr=long term gain. Not to mention I didn't ask anything about long term gains my question was only dealing with 1 year or less. Then he tells me I shouldn't be doing any trading because I dont know the difference, does that mean since you cant answer my question you have no business trading stocks either?

If he had read my question it would be quite obvious I understand that if you dont hold it for a year you are penalized with short term gains my question was regarding the clarification of the rule and other factors that would be accounted for in the penalization.

I was hoping to get some sort of useful feedback but would of been just as ok with none at all.

[Bishop]

Your reaching really far on all that, but hey your allowed to interpret things your own way. I'm done with this portion of the thread, You never give advice and I blame problems on everyone but me your right!

[Guest]

Really?

I wondered how long it would take before you debriefed the comm.

Bishop, be glad you got out of that debrief in under 6.9 hours...this is close to a record wrt debrief brevity for an Eagle guy!

[Danny Noonin]

I wondered how long it would take before you debriefed the comm.

Bishop, be glad you got out of that debrief in under 6.9 hours...this is close to a record wrt debrief brevity for an Eagle guy!

Just be glad I didn't chalk up the lines.

We would have had to listen to how it was my fault he hit the floor.

Edited October 18, 2012 by Danny Noonin

[ThreeHoler]

2013 contribution limits: IRA - $5,500; Elective Deferral - $17,500. Defined Contribution - $51,000.

https://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

[Swizzle]

Revival...because these benefits are easy to get (especially if retired w/ disability) and some reduce taxes from investments/retirement pay

https://myarmybenefits.us.army.mil/Home/Benefit_Library/State__Territory_Benefits.html

*there is something for anyone with service time of more than 90 continuous days - ever - in some states....

If the State Governors calling for no income taxes in exchange for sales tax increases get what they want....shopping on-base, tax-free will be more worth it.....if they carry stuff we need..

[BattleRattle]

Looking for some advice:

My wife had a traditional 401K with her previous employer. She has since moved on to a new employer. We rolled over the amount from the traditional 401K into a USAA Roth IRA and attempted to pay tax on it so it could grow interest free in the new Roth account. For whatever reason, when the transfer was made, no taxes were taken out. This happened in the 2011 calendar year.

What are my options?

[Learjetter]

File an amended 2011 return.

[BattleRattle]

Can I just try to pay the taxes on the 2012 return?

[Butters]

Can I just try to pay the taxes on the 2012 return?

Really dude? You are asking random people on BO.net a Tax Law question. Try asking a Tax Professional, or keep asking us and hope you can continue to post from Federal Pound Me In The Ass Prison when you are sent there for tax evasion.

Oh, and to answer your question... No, you can't.

Edited January 24, 2013 by Butters

[JS]

I actually did something very similar - transferred a 401K into the Roth with USAA to pay the taxes now while my tax bracket was low due to the mortgage interest deduction, child credits, deployment tax-free income, etc. I believe when I paid the taxes on it, my effective rate was still only like 5%. For the most part, your taxes will not be much lower than they are right now if you have a mortgage, kids, or any tax free deployment income.

When I converted, I received a 1099-R, which, like all 1099's just signifies income being disbursed to me. The "-R" if for money coming from a retirement account just like a 1099-INT is for interest from a savings account and a 1099-MISC is for income from miscellaneous jobs not on a W-2. The disbursement code on my 1099-R was "Q," which means it was disbursed to another plan (a rollover), so no penalties or taxes were taken out. Make sure your 1099R has this code, otherwise you might get screwed.

From there, I plugged everything into Turbotax like I do every year. For some reason, Turbotax choked on the Q code and didn't ask me to take out taxes. After calling the IRS, they advised me to just manually rig the numbers in Turbotax to show that I received the $50K, or whatever, through a taxable, zero-cost basis, transaction. Turbotax then took the taxes out.

I did my rollover in 2010, and during that time they had an option to spread the taxes out over two years. From what I have read, that is no longer an option, and you would have to have paid the taxes in your 2011 tax year.

Remember, 1099s don't get taxes taken out of them. That's why people with their own businesses who receive income on a 1099-MISC must prepay taxes through out the year, because none is withheld Same with a 1099-INT or 1099-R, no taxes will be held, so it is up to you to correctly report it and pay the taxes manually.

So, the solution is what the person above stated - you will have to file an amended 2011 return, listing the rollover as taxable income from a 1099. Again, I used Turbotax, and once I manually got around the Q-code glitch, it guided me toward paying the taxes on the amount of the rollover.

If you really want, I can sent you sanitized copies of my 1040 and the form that TurboTax filled out for the rollover to help you. That form was IRS Form 8606, by the way. And as I have mentioned, the key was to manually rig that form for a "zero cost basis" for the rollover, thus making the entire amount taxable. That's what the IRS guy told me. After that, the amount of the rollover was simply placed on line 16b of my 1040 for that year. So, really, you just have to fill out the two pages of form 8606 and then file an amended 1040 with that extra line filled out.

PM me if you want copies of the forms I filed. Or you can pay that "tax professional" a couple of hundred bucks to do the exact same thing.

[Butters]

Just make sure you save these posts to show the IRS when you get audited. "No Mr. IRS man, you are wrong, a guy on the internet told me to do it this way!"

However, JS is correct.

[JS]

Ha ha. Good point. But then again, I trust the opinions of a lot of people on this board - especially the guys I have met in person - more than I do some of the idiot tax preparers at H&R Block.

My philosophy with looking things up on the internet is this (I am sure a lot of people have the same philosophy): If I have a tax, legal, or medial question, I am not so fucking stupid to not realize that I might/probably have to contact an accountant, lawyer, or doctor. But, like most informed consumers, I usually feel a 20-minute time investment on the internet is worth it. Maybe I can find the right answer, but I think anyone with an IQ above 25 knows that the backup plan to searching the internet for advice is to contact the professionals who handle that field. I just hate it when you see 20 replies to a tax question all have "you need to contact an accountant." No, shit. I really would not have known that had the 20 of you not posted that. Maybe the person can't afford a professional, or maybe they would at least like to see if others have had the same issues and how they handled it.

Anyway, you are right. When in doubt, contact an accountant to fix this small tax mess.

[Spur38]

Samr thing happend to me with Turbo Tax; a glitch in the system which led to a big increase in gross salary. As JS states there is a workaround and hopefully Turbo got it fixed. I did recieve a letter from the IRS approving and agreeing with the 8606 form and line 16b changes....hold on to that magic ticket if you get it!

[otsap]

...transferred a 401K into the Roth with USAA to pay the taxes now while my tax bracket was low due to the mortgage interest deduction, child credits, deployment tax-free income, etc. I believe when I paid the taxes on it, my effective rate was still only like 5%. For the most part, your taxes will not be much lower than they are right now if you have a mortgage, kids, or any tax free deployment income.

Not calling you out specifically because I don't know your situation, but I see people make a mistake very frequently concerning Roth vs. Traditional. If you are earning money tax-free, which is pretty specific to military, then by all means go for the Roth. However, if you're in a staff position or other job where you don't deploy to get tax-free (or earning money like the average American), then Traditional will be your best bet. Child credits, mortgage interest, etc, are irrelevant. When you contribute to a Roth IRA your taxes are front-loaded at your marginal rate (your highest). With a Traditional IRA, you are taxed on the back-end, during retirement, at your effective rate (based on ALL tax brackets).

A second consideration is the money you will save by paying less in taxes by reducing your taxable income through contributions to a Traditional IRA. That money is lost if you contribute to a Roth.

It is nice to know that the money in your account is yours, but unless you're earning money in a tax-free zone, the math simply does not favor a Roth IRA. Crunch the numbers if you must. But remember to include the large differential between marginal rate (Roth) and effective rate (Traditional).

I mention this because of your post above. When someone roll's over their Traditional into a Roth, it causes a "spike" in their marginal rate, exacerbating the scenario. Just make sure you run the numbers yourself to see what is best.

On a personal note, I don't want to give the government any more money than I have to, any earlier than I have to. I know, it's not quite logical, perhaps. I guess it's just a mentality, but there it is.

[Danny Noonin]

If you are earning money tax-free, which is pretty specific to military, then by all means go for the Roth. However, if you're in a staff position or other job where you don't deploy to get tax-free (or earning money like the average American), then Traditional will be your best bet. Child credits, mortgage interest, etc, are irrelevant.

Interesting. So what you're saying is that Roths only make sense if you have tax free income? I wonder why so many pros recommend them for many investors and scenarios? Must be a conspiracy. Or you're out to lunch. One or the other.

For example, why is it that you say mortgage deductions are irrelevant? Think it through.

[JS]

Yeah, I definitely don't agree with some of the stuff in your post. I think a lot of people get confused with "tax-free money" from a deployment versus other deductions. Unless I have misunderstood it all these years, here is how I think it works: at the end of the year, you have an amount of income that gets taxed (adjusted gross income). Things that can reduce that amount include tax-free income, mortgage deductions, business/investment losses, mileage write-off for traveling reservists, etc. Your calculator does not care which items reduced your AGI, it just cares what your final AGI is. That number is then looked up in a table and you pay XX percent taxes on that number. That tax number can then be reduced further with credits such as the child tax credit, etc.

The money you earn in Afghanistan is not somehow specifically marked with traceable serial numbers as tax free money which can be invested in a Roth, as some people think. Actually, every income earner in the country receives some form of tax-free income. It is called the standard (or itemized) deduction, and the standard deduction for 2012 is $5950 for a single person. There are also deductions for dependents (including yourself), known as exemptions, that make your taxable income even lower. So in other words, ignoring the personal exemption for illustration purposes, if you were nonmilitary and you worked for the man earning $36K, you would be taxed on $30K after taking the standard deduction, so about $6K of your income is tax free, just the same as income earned in a tax-free combat zone.

Another example (with numbers simplified, not counting exemptions and other deductions, tax free housing allowances, and all other things assumed to be equal): Say single person A is not in the military and works for the man earning $56K per year. That person takes the standard deduction and pays taxes on $50K, which is a little more than $8K. His effective tax rate in this example is $8K/$50K = 16%

Say single person B is a captain who deployed for 3 months and earned a total of $68K, with $12K being combat tax-free income. He will pay taxes on $68K - $12K combat pay - $6K for the standard deduction = $50K. The same as person A. His tax bill will be a little more than $8K as well. His effective tax rate is $8K/$68K = around 12%.

Assume person C is not in the military but paid $18K of mortgage interest and worked for the man earning $68K/year (assume the others lived in apartments or something). He will be taxed on $68K - $18K for the itemized deduction of the mortgage interest = $50K. He will also pay about $8K in taxes and have an effective tax rate of 8/68 = 12%

My point is that all three have “tax-free income” and if all three put their $5K into a Roth, they would all be in the same boat financially that year and would be able to withdraw the Roth earning at retirement without having to pay taxes on it. So I completely disagree with your statement that mortgage deductions and child credits are irrelevant. Those items reduce your tax bill and lower your effective tax rate in the exact same way that combat pay does. In my above example, the military guy who lived in an apartment but got 3 months, $12K of tax free combat income has the exact same tax bill and tax rate as the civilian guy with the $18K in mortgage interest. So your thoughts on guys with staff jobs or civilians not having items that dramatically reduce their tax rates are completely out of line with the way I understand it.

Here is the very simple way I decide if I should invest in after tax dollars and withdraw tax free (Roth) or invest in tax deferred dollars and pay taxes at withdrawal (401K, IRA, TSP, etc): do I believe that my effective tax rate will be higher when I withdraw the money at retirement, or do I believe my effective tax rate will be lower today. As I mentioned, my effective tax rate (and most Americans for that matter) has been pretty low over the past decade thanks in large part to lower overall rates and things like the mortgage deduction and child tax benefits. I am indeed betting that rates will go up (they obviously already have starting this year) and that the mortgage and child tax benefits will be cut away in the years ahead. Also remember, tax rates over the past decade have been at the lowest in decades – during the Carter, Reagan, Bush 1, and Clinton years tax rates were higher. Now they are coming back up again.

Over the past six or seven years, our household has brought in roughly $100K/year income between me and my wife (a little more recently due to promotions, etc, whatever). Here were my effective tax rates over those years:

2011: -0.3% (no, the IRS did not actually send me more money back than they withheld)

2010: 5.3% (this is the year I rolled over my old employers 401K to the Roth, so I had an additional $25K of taxable income that year, pushing our income levels for the year way over $100K)

2009: 1.5%

2008: 4.1%

2007: 0.3% (bought our house this year)

2006: 7%

So, in the end, I am literally betting my retirement on the assumption that my effective tax rates will never be this low again. I think the writing now, even more so than in the past, is very clearly written on the wall. Taxes will go up and deductions will go down. Plus we will continue to make more money in our careers, so it made sense for me to pay the tax on that $25K back then. As you can see, I ran the numbers and even with the “spike” in my income that you mention, my tax rates were still pretty low in 2010. (insert standard bullshit disclaimer here – everyone’s situation is different, when in doubt, throw your money away on some tax “professionals” or “investment advisors” instead of figuring it out on your own. Or, as some say on this board, your mileage may vary.) Also note that during the above years, I never had more than about 3-4 months of combat zone time in any given year, so the low rates aren't unique to just military guys (see Mitt Romney). The truth be told, after all the deductions, etc. rates have been pretty low for everyone.

When you contribute to a Roth IRA your taxes are front-loaded at your marginal rate (your highest).

This is completely not true. As I illustrated above, each year, you are going to wind up with X dollars left over after the dust settles and you pay your federal bill. You will have paid a certain effective tax rate. If you happen to have $5K sitting in the bank for whatever reason (could have been there for 10 years, for example) and toss it into a Roth, that money was not taxed at your highest rate that year. I just don't see how that is possible. I think you, like many others, are very confused about how marginal rates work. When you go into a new bracket, only that portion above the last bracket is taxed at the higher rate, not your entire income. That's why the lower bracket rates are all averaged into your overall tax bill to give you some strange effective tax rates like 10.5% or 13.1%, or whatever. This article tries to explain marginal rates and brackets a little more.

With a Traditional IRA, you are taxed on the back-end, during retirement, at your effective rate (based on ALL tax brackets).

...But remember to include the large differential between marginal rate (Roth) and effective rate (Traditional).

I have read these two lines about five times already and really don't understand what you are saying here. Effective tax rate is basically just an average of all of the marginal rates that you hit on your way up to your final marginal rate. That way, for example, if you ended up with $100K of taxable income (clearly deep in the 28% marginal tax bracket), your effective tax rate would be something like 20%, because you would average in all of the lower brackets that you passed on your way up to $100K, just like that article illustrates.

So, the dough you put into your Roth, just like all of your other dough that year (see above) was all taxed at your effective rate. The dough you take out of the 401K at retirement is also taxed at your effective rate. All of your income, all the time, is taxed at your effective rate at when you look at it over the course of the entire year. That's why I simplify the decision by simply trying to guess if I will have a lower effective rate today (Roth is better) or at retirement (401K is better). But to say that if you are in a staff position or don't have tax-free combat pay, that a traditional tax deferred IRA/401K will always be the better bet is just dead wrong.

[otsap]

I have read these two lines about five times already and really don't understand what you are saying here. Effective tax rate is basically just an average of all of the marginal rates that you hit on your way up to your final marginal rate. That way, for example, if you ended up with $100K of taxable income (clearly deep in the 28% marginal tax bracket), your effective tax rate would be something like 20%, because you would average in all of the lower brackets that you passed on your way up to $100K, just like that article illustrates. So, the dough you put into your Roth, just like all of your other dough that year (see above) was all taxed at your effective rate. The dough you take out of the 401K at retirement is also taxed at your effective rate. All of your income, all the time, is taxed at your effective rate at when you look at it over the course of the entire year. That's why I simplify the decision by simply trying to guess if I will have a lower effective rate today (Roth is better) or at retirement (401K is better). But to say that if you are in a staff position or don't have tax-free combat pay, that a traditional tax deferred IRA/401K will always be the better bet is just dead wrong.

The sentence in bold is where we differ. Because your IRA options are Roth or Traditional, and Traditional is taken off the TOP of your tax bill (your highest marginal rate), then that rate must be considered and applied toward the alternative, the Roth.

(Edited for duplicated post)

Edited January 26, 2013 by otsap

[otsap]

Interesting. So what you're saying is that Roths only make sense if you have tax free income? I wonder why so many pros recommend them for many investors and scenarios? Must be a conspiracy. Or you're out to lunch. One or the other.

For example, why is it that you say mortgage deductions are irrelevant? Think it through.

For a point of reference, here's an example with two single-filers who each made $80K in 2012, Person A and B:

A/B

80K/80K = Total income

-5K/-0K = Traditional IRA contribution

75K/80K = Taxable income

14779.60/16029.60 = Taxes paid

60220.40/63070.40 = "Take home" pay

-0K/-5K = Roth IRA contribution

60220.40/58070.40 = Final income after taxes and contributions

Person B paid $2150 to shelter $5000 in their Roth. When Person A withdraws their $5000 in retirement, they will pay the effective rate, assuming their income during retirement comes from their retirement savings. If we assume that Person B saved really well and will have the same income during retirement ($80K), then in this scenario they contributed to their Roth at the 25% marginal rate to avoid a 20% effective rate.

Credits are irrelevant because they're dollar for dollar returns. All things equal, a $1000 child tax credit for Person A and B is $1000 in their pockets.

Deductions are irrelevant also, though slightly more confusing as to why. The deduction you get for contributing to a Traditional is on top of other deductions. So again, if all things are equal, then Person A will have $5K more in deductions. The only difference, which is in Person A's favor, is the possibility of their additional deductions knocking them down to the next marginal tax bracket.

Or you can go with the pros. That's fine too.