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August 31, 2012


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So I'm confused. What is the author suggesting is the best path?

Steve --

What I got out of it is this:

1. The issue is complicated.

2. Whether or not you make a decision, you've made a decision (either by action or inaction.)

3. The decisions you make can have big impacts on your finances.

4. You need professional help since every person's situation is different.

I am too young to remember, but I have heard rumors that in the 80's, maybe early 90's there was an opportunity for people to convert a traditional 401k into a Roth with zero penalty. It might have been Reagan from what I remember, but it was all based on what the economy was doing. I believe a lot of it had to do with the recession, and since we are in one, could another opportunity like this arise in the not so distant future?

Anyway, does anybody know how all this went down and if it could happen again? Not really banking on it, but I sure would feel dumb if I get into a Roth, only to find shortly after we have a "duty free" time.

Generally speaking people have the wrong mindset when it comes to tax planning. Most people think I want to pay the least amount of taxes right now. I have watched multiple people make this mistake.

When I was shortly out of college my dad had told me how proud he was that he had gotten his taxable income down to $17,000 for a particular year. (As a farmer there are all kinds of strategies that can be employed to move taxable income around from year to year). I was a little bit rough on him and I am sure he was a bit shocked at how I was basically telling him he had made a large mistake. He was defensive and didn't really want to hear what I was telling him but he sees it now.

He has now been semi retired for almost a decade now and every single year he has had taxable income approaching 6 figures. This is exactly what I had told him would happen because I new as a farmer he had deferred significant amounts of income to avoid taxes that would become taxable later.

By reducing his taxable income to $17K He had wasted $40K of his 15% bracket. Money he could have paid taxes at 15% on during that year is now being taxed at 25% in his higher tax brackets.

There are many complicated situations that might need tax planning but to simplify the situation for most people what you should be shooting for is tax smoothing. You want to keep your taxable income somewhat steady. Peaks and valleys in taxable income will result in higher taxes paid because you will waste parts of your cheaper tax brackets in the valley years and end up paying much higher percentages in the peak years.


I don't know of any ability to convert a 401k but you could convert an IRA to a Roth in 1998 and pay the taxes but not any penalty. Beginning in 2010 anyone can convert any IRA to a Roth at any time with no restrictions as long as you pay the tax in the year you convert. This is actually a great strategy to do some tax smoothing in years where you might have a drop in income.

There has never been a time you could convert to a Roth and not pay the taxes due that I am aware of. There would seem to be no reason for that to be offered and I would be shocked if it ever was.

Thanks for clearing that up Apex, I think the option in 1998 you mentioned is what I misunderstood.

I think the point is no one solution is the best. Each has its pluses and minuses. A suggestion is to have a mix that you can draw upon depending on the many factors that could change in the years.

a crude math example that really does not explain it all other than they all have different answers

(a+b)x t=x or(b)x t+c=y or (a+b)x t+c=z or(a+b)x t=w

Good article. Point I take from this is that you don't want all your retirement in one kind of account. Plus it is a good idea to strategically put money in pre-tax or post-tax accounts based on your current income level.

I'll nitpick one point : "Senior citizens hold most of the wealth in America." Seniors own about 1/3 of the nations wealth if you're looking at family net worth which is not 'most' of the wealth. People age 55-64 actually have higher average net worth than seniors. (reference the latest survey of consumer finances 2010:

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