Traditional IRA vs Roth IRA

[Dividend Watcher]

(04-12-2015, 10:44 AM)rayray Wrote: Married couples filing jointly will not pay any Federal taxes if earned income is less then 95 500 in QUALIFIED dividend income. This assumes the couple has no other source of income, i.e., pensions, SS, rental income, ect ect ect. Any other income other then QUALIFIED dividend income comes into play and all bets are off, taxes are entering the ballgame.

So, you're going to forgo Social Security? That amount would be more than the savings you would've realized if you took no income.

(04-12-2015, 10:44 AM)rayray Wrote: This still brings me to the Roth vs Traditional IRA debacle.

Through current tax laws, assuming I'm not understanding this wrong, we can convert monies from Traditional IRA's and tax deferred Kplans to Roth IRA's as long as that amount is equal to or less then the STANDARD deduction of 20 600. So, every year one can transfer 20 600 from tax deferred IRA/Kplan to a Roth IRA and pay no taxes in the process. That's a huge loophole in order to avoid taxes.

All distributions from a pre-tax 401(k) and traditional IRA are considered taxable income, and NOT qualified dividend income, regardless of the source. That includes custodian-to-custodian transfers. So, this is added to any income you make for the year to live on and taxed accordingly.

Two pitfalls here. Unless you have money under the mattress to live on so you don't have to report any other income, you're going to have to file a 1040 to take advantage of the standard deduction & exemptions. Red Flag for the IRS #1 is you've filed 1040s in the past and all of a sudden you don't file or file with no tax due. Expect a letter from the IRS within 2-4 years asking you to prove you didn't have to file or are indeed a 'no tax due' filer but still had a source of money to live on.

This brings us to Red Flag #2 which is even worse, in my opinion. Yes, you had cash laying around to pay all your living expenses. Where did it come from? The IRS hates lots of cash sitting around and you can expect your name to get flagged both within the IRS records and also the FBI, DEA and the rest of Homeland Security. You may never hear from them but they'll be snooping around to find out why you have all that cash. Drug dealing? Terrorist? Organized crime?

But let's say you go around picking up scrap to live off of and you tell the IRS that's where it's coming from. Normally, unless it's large amounts at a time, no one will be the wiser unless you self-report. But tell the IRS it's your source of income so you don't have to file and all of a sudden they're NOT going to consider that a hobby and expect you to now file Schedule C as an unincorporated business in addition to the 1040. Ooops.

(04-12-2015, 10:44 AM)rayray Wrote: This makes me think that 401k plans and Traditional IRA's in the accumulation phase is the way to go. Then use the tax laws accordingly to save massive amounts of dollars.

.

Ben Franklin had it right ... “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

The best that can be done is to minimize it with judicious planning. I don't recommend letting the tax tail wag the investing dog.