2011 and 2012 tax rates

My crystal ball cracked many years ago. I can tell you what is going to happen if your Congressional representatives sit on their behinds and do nothing this year. The tax structure put in place in the 2001 and 2003 legislation will expire at midnight on 12/31/10.

Here goes: The progressive rates of 10, 15, 25, 28, 33 & 35% go poof and get replaced by 15, 28, 31, 36 & 39.6%.

The capital gains rates go from 0 & 15% to 10 & 20%. Dividends revert back to being ordinary income.

Distribution of earnings from College 529 plans are no longer tax-free. The American Opportunity Tax Credit goes poof.

Mortgage Insurance Premiums (MIP) cease being treated as qualified mortgage interest.

The Child Tax Credit reverts back to $500 and the additional child tax credit requires earned income greater than $12550.

The federal estate tax exemption reverts back to $1,000,000 and the top tax rate goes to 50%.

On the other hand the super long rates of 8/18% return, or more correctly, apply for the first time.

One more concern for anyone in the 35% rate: If you are paying Medicare Part B premiums, they will get heavily, very heavily surcharged.

< converted a large amount of IRA and 403(b) to Roth in 2010. How to pay the taxes?>

Wrong. The number two option is to split the INCOME over the two years and pay the tax at the then current rates. The good new is that by the time you have to make the choice, you should at least know what the 2011 rates will be.

I have a question about this. How can you convert an current employee's 403(b) to a Roth? (Which is I think what you're saying). Is there a provision for doing this, or am I misreading?

Steve

I'm with you Steve. I thought the only way for an employee to take their own contributions out of a 403(b) was to reach age 59 1/2, become disabled or have a financial hardship. Withdrawal of employer contributions have the same rules except there is no financial hardship exception. Lastly, I believe that after-tax contributions are fair game.

You can rollover all/part of a 403(b) to an IRA. We did this back in Dec

2006. From there you could always convert from the IRA to a Roth.

However, you can also convert directly from a 403(b) to a Roth, and continue contributing to the 403(b).

In this case, I changed the options so the contributions go into a money market, so, at today's rates, there would be no income in the 403(b) as I almost immediately convert the contribution to the Roth as soon as the contribution is made. I leave behind a small amount to cover the quarterly fee for the 403(b).

Conversions/rollovers are mot withdrawals.

What are the income levels for each bracket?

There seems to be general agreement that the current mix of 6 rates is better than just 5 rates. If I was a betting man, I would guess that the first 4 rates would stay the same with income levels adjusted for inflation and that the upper two rates of 33 & 35% would be increased to somewhere around the old rates of 36 & 39.6%. There are also proposals to redefine the definition of taxable income for the upper two tiers.

On Fri, 23 Apr 2010 14:41:59 EDT, Alan wrote Re Re: 2011 and 2012 tax rates:

Is this a great country, or what?

Regarding the "additional 7% on her regular income," pardon? I wonder if you are aware that the tax rates you are quoting are marginal rates. This means that the first roughly $172k of your sister's income in 2010 will be taxed at 28% and less. Anything above this and up to about 374k gets taxed at 33% in 2010, etc. See

As to your sister's options: Future tax rates and policy are so uncertain. Hence diversity seems a safe course, and I would consider a third option:

1. Convert only enough to bring your sister's income to the upper limit of the 33% bracket for 2010. Advantages: First, as discussed above, the tax on your sister's regular income is not affected. Second, the tax rate on the converted amount will be lower than options 1. and 2. Third, you will have converted around half of what you had hoped using options 1. and 2. This is spreading your risk.

Since you have already converted some $500k, this means you would have to re-characterize.

I'd kinda like to know how old your sister is, too. Off the top of my head, under 50 might argue for converting the whole shebang. But it's just not so clear cut. Whence we are back to 'tax diversification.' It is absolutely no different from thinking that investing in X might yield 3% a year, while investing in Y might yield -2% a year but it might also yield +10% a year. What to do with such uncertainty? Buy some of both and always have plenty conservatively invested for a rainy day.

Why the rush to convert that whole sum? With the 28% bracket ending at $171,850 (taxable) income, you are sending her into the 35% bracket. Even after rates go up, $100K isn't likely to go to that level. Where did the other $100K income come from? Is that earned income? Once she stops working, her bracket would be even lower. I continue to question the Roth Mania and people converting far more than they should. Joe

"to redefine the definition of taxable income" - what such proposals?

She is already well into the 28% bracket.

I already considered that. Due to her circumstances, taking the tax hit at 35% is better, e.g., ALL the converted money would grow tax free,

In her case, age is not relevant. She will never have to use the money, unless there is an emergency. My sister will be in at least the 28% bracket when she retires,

The goal is to have the money grow tax free.

Of course, nobody knows when there will another bad market.

Since 17 March 2010, the day of the IRA conversion, 403(b) conversion occurred on 18 March, as of 23 April 2010, Roth Annualized rate of return is 47.866%. The money is invested in 20 mutual funds and 6 ETFs.

The taxable account from which the taxes will paid, for the current year has Annualized rate of return is 35.797%. The money is invested in 13 mutual funds and 5 ETFs.

To have the money grow tax free. and avoid future higher tax rates.

Yes, but that 7% should be made up for by future tax free growth.

Yes.

Not in her case. She will be in, at least, the 28% bracket when she retires.

I disagree, and I have NEVER seen this point properly discussed.

Assume one can pay the taxes from outside the Roth.

It makes no sense to wait, as converted funds will grow tax free.

So, even if you are in the 35% bracket and expect to be in the 10% bracket when you retire, it makes sense to convert ASAP.

1. If you wait to do MRDs, that money cannot be reinvested tax free.
2. Converting at whatever is your current tax bracket, or, if it makes sense, splitting over 2011 and 2012, you will eventually make up the tax difference due to the tax free growth. E.g., as of 23 April, my sister's Roth is up 615.39 since the March conversion. Of course, there's no guarantee that increase will hold in the future.

Remember that you don't have to make this decision until you file your

2010 return. I'd file for the 6 month extension. By October 2011 you should have a good idea of what the 2012 rates are going to be.

Phil Marti VITA/TCE Volunteer

Can't a 403(b) be rolled over into an IRA?

Personal exemption phaseout and the limitation on itemized deductions.

For more information on the administration's proposal, see:

Say your 401k/403b has 500,000k. The MRD is probably that value divided by 25, or 20k a year for 20 years. If you're in the 15% tax bracket, that's 3k tax a year for 20 years, or 60k total. Of course, the money will grow over those 20 years, and your RMD will increase, and so you might actually end up taking 30k a year by the last year. So the total tax will actually be like 90k.

But if you convert all 500k now, the tax is 35% or 175k. Don't forget state taxes too.

You could retire in FL and cut out state taxes on the RMD of 20k to

30k. Whereas if you convert now and live in a tax state, then you have to pay taxes.

But you did say you expect her to be in the 28% tax bracket at retirement. So 28% of 20k, is 5.6k, times 20 years is 112k, times 1.5 is 168k. Plus if they do nothing with the tax code, then the 28% tax bracket will become 31%.

If you're young, there will be more growth before you take the RMD, so that's why it makes more sense to convert while young.

Then again, if you want to convert and buy some health care stocks, generic drugs, and are willing to take the risk, then go for it!