Mr. Schwartz,

Given your stance on Roth IRAs (which I know you do not like, given the "promise" of tax free earnings), what do you think about 529s? Should I participate or go my own way? Thank you!

Rick

Hi,

Actually, I'm not a big fan of Roth accounts when high income taxpayers give up a current year tax break in exchange for a promise from the government that money can be withdrawn tax-free when they retire.

I have a lot of high-income clients who are maxing out their 401k or 403b accounts at work, have been making post-tax contributions to their traditional IRA, and will convert those IRAs to a Roth IRA in 2010. I like this strategy because they did not give up a current year tax break, and will not pay too much taxes to end up getting some money into a Roth account.

As for 529 Plans, I like them a lot. Since there is no pre-tax alternative to education savings accounts, you do not give up a current year tax deduction when you fund a 529 account. Any money contributed to a 529 account grows tax-deferred, and withdrawals used to pay for a child's college tuition and other allowable expenses are tax-free. Plus, the money contributed into the 529 account can be switched between siblings, and can also be withdrawn at any time, subject to a tax and 10% penalty on the earnings.

Please note that money in a 529 account may impact your financial aid down the road. But most established healthcare professional won't qualify for much aid anyhow.

So I hope I don't sound like a hypocrite, but I do like Roth accounts in certain circumstances, and I do like 529 accounts too.

Zip Code: 01801

Thanks for your reply. This is interesting to know. You do not sound like a hypocrite, but I would like to inquire further. You say that you don't like Roths because the high income taxpayers give up a current year tax break. However, I don't know which tax break you are talking about. I maximize my 401k/403b, but that's it right? Technically, beyond that tax break, these high income earners aren't qualified for ROTH contributions anyways. So there really was never an option to contribute to a ROTH because they wouldn't qualify. So high income earners don't even need to think about ROTHS. Unless, of course, you are referring to the option of a ROTH 403b which some institutions are now offering. Does what I say make sense? Any thoughts?

Thanks!

Rick

Hi,

Here are some of the articles I've written over the past 3 years about how high-income taxpayers can finally get some money into a Roth IRA without giving up too much of a tax break, or paying too much in taxes:

Memo on Roth Conversions - http://www.mdtaxes.com/news0110.html#1

Minimize Taxes On 2010 Roth Conversion With IRA Roll Out - http://www.mdtaxes.com/news1209.html#1

The Re-emergence of Non-deductible IRAs - http://www.mdtaxes.com/news0307.html#1


I hope these three article help explain this unique opportunity available to high-income taxpayers in 2010.

Zip Code: 01801

Andrew,

Interesting point. If my traditional IRA is worth 150000, and I have been contributing for sometime, with a nondeductible basis of 30000, can I not just designate 30000 to converto to ROTH this year? Is it not that simple? then i would avoid paying taxes because i have already done so?

Zip Code: 10020

Unfortunately, the Roth conversion rules do not work like that. The value of your post-tax IRA contributions needs to be allocated evenly over all of your IRA money. So with $30k of basis and $150k of IRA value, you'll shield 20 percent of each dollar converted from taxes, and pay taxes on 80 percent of the converted amount.

Check out the Form 8606 to see what I'm talking about:

http://www.irs.gov/pub/irs-pdf/f8606.pdf

Zip Code: 01801

And please call me Andrew.

Zip Code: 01801