Ask Rande 10,000+

Top 216. Oct 3, 2001 6:34 PM

» Rande - Re: Re: Re: Re: Re: Taxes for Year 2001

In response to message posted by Indexer:

Indexer,

Terrific! Glad to be of help. And here's a "trick" for those who are thinking of using margin debt for general purposes and still want to be able to take the interest expense deduction:

Instead of borrowing against your investments and using the proceeds for general purposes, which results in a disallowance of deductibility, you could sell some of your investments and use the proceeds for whatever purpose you had in mind and then use margin debt to replace the investments so that the proceeds of the debt will qualify under the tracing rules (won't work for purchase of tax-exempt securities). Of course, you would have to take into account any tax impact on the sale of the existing investments.

Is this an endorsement to take out margin debt? Of course not. Margin debt is a risky proposition under any circumstances and the vast majority are better off without it. But, if other sources of debt are not an option and you are determined to use margin debt in any event, it might as well be tax deductible in the process. The key with any debt is to use it wisely, take advantage of the law insofar as you are able to do so, and manage your affairs such that you are the master of your debt and not the other way around.

-- posted by Rande

Top 217. Oct 3, 2001 7:30 PM

» Kirk - IRA Contribution

Hi Rande

I am helping someone with his investments and he wanted to know when the $5K IRA limit starts? He is single and has a 6 figure income after deductions so no ROTH.

Is there a timetable for the increased IRA deductions? I honestly forget the whole thing this year with the 9/11 attack and just drew a blank when he asked. Can he do more than $2K this year? He fully participates in his 401K plan also.

Thanks!

-- posted by Kirk

http://www.us.kpmg.com/microsite/taxnews...

Top 218. Oct 3, 2001 7:45 PM

» Rande - Re: IRA Contribution

In response to message posted by Kirk:

Kirk,

The IRA contribution limits are still $2K this year, but they are headed higher in future years. There is still an AGI limit for Roth eligibility and an AGI limit for regular IRA deductibility when the taxpayer participates in a qualified company plan.

Here's a link for the new law changes on IRA contribution limits (click on "Individuals" at the left):

Contribution limits

The maximum annual dollar contribution limit (whether deductible or nondeductible) increases to $3,000 in 2002-2004, $4,000 in 2005-2007, and $5,000 for 2008. The limit will be indexed (increased with the rate of inflation) in $500 increments starting in 2009.

Phase out

The earlier income phase-out range for an individual who is not an active participant, but whose spouse is, remains $150,000 to $160,000.

"Catch-up" contributions

An individual who is at least age 50 by the end of the taxable year can contribute up to an additional amount as follows:
$500 in 2002-2005
$1,000 in 2006 and later

Effective Date

Effective for tax years beginning after 2001.

And here's a good general site for Roth IRA issues:

http://www.rothira.com/

-- posted by Rande

Top 219. Oct 3, 2001 10:05 PM

» Kirk - Re: Re: IRA Contribution

In response to message posted by Rande:

Thanks Rande! Pretty amazing how much money we are allowed to put away tax free. It wouldn't surprise me if we see lower tax rates someday as people realize how much they have to pay on all that money when we take it out. I STILL don't trust the Roth... IF you pay the tax now and they lower the rate in the future, you sure as shinola won't get a refund. Consider all the people that paid the ROTH tax last year... the tax rates next year are lower!

-- posted by Kirk

Top 220. Oct 3, 2001 10:31 PM

» burkmorz - Kirk....

In response to message posted by Kirk:

Kirk, I haven't gone back and read all of the recent posts on Rande's thread here....so maybe what I am about to say has been covered.. but I did read the past few, including the one regarding your friend you were trying to help.

I just wanted to mention that in addition to the additional amount one can contribute to an IRA next year, other deferred comp. maximum amounts change, also.

For example, 401k, 457, 401a limits also increase. In fact, for the first time one can max out both the 401k and the 457, for example, for a total of $22,000...$11,000 in each of these deferred accounts (if one has both of them, etc.)....this is all on top of the IRA amounts.

Also, one can now convert a 457 to an IRA if one desires instead of leaving the money in the 457...

Anyway, just wanted to mention some other possibilities...dunno what your friend's options are with regard to deferred accounts...

Feel free to correct or revise any of what I said that isn't fleshed out, Rande...I just wanted to give some quick info here....

-- posted by burkmorz

Top 221. Oct 4, 2001 5:20 AM

» Rande - Re: Kirk....

In response to message posted by burkmorz:

Good stuff burk. There's some details on those pension changes too, at the 2001 tax act link I posted above.

-- posted by Rande

Top 222. Oct 4, 2001 9:05 AM

» burkmorz - Re: Re: Kirk....

In response to message posted by Rande:

You bet, Rande..thanks for your assistance and advice on here!! smile

-- posted by burkmorz

Top 223. Oct 4, 2001 11:05 AM

» Will_L - Re: Re: Re: IRA Contribution

In response to message posted by Kirk:

"Thanks Rande! Pretty amazing how much money we are allowed to put away tax free. It wouldn't surprise me if we see lower tax rates someday as people realize how much they have to pay on all that money when we take it out."

Has anyone suggested that deferred compensation programs and regular IRAs should be treated at a lower tax rate than ordinary income? I would think with the baby boomers coming, there would be a lot of politcal clout suggesting that perhaps such withdrawls ought to be taxed at a lower rate?

-- posted by Will_L

Top 224. Oct 4, 2001 11:25 AM

» Rande - Re: Re: Re: Re: IRA Contribution

In response to message posted by Will_L:

I'm not sure what the reasoning would be to apply a lower tax rate to regular taxable IRA withdrawals, since the original contributions would have been taxed at the ordinary rate had they not been deferred. Trying to break out any long-term capital gain component at the time of withdrawal would be impractical unless meticulous records were kept all along. The ordinary rate hit on taxable IRA (and 401k) withdrawals, even for additional long-term appreciation, if any, is a drawback. BUT, the benefits of tax-deferred compounding overcomes that hurdle. In addition, tax-efficient positioning of assets in and out of deferred accounts (long-term assets, such as index funds outside, and higher turnover funds and/or taxable fixed income funds inside) can help mitigate the issue. Finally, there is the potential advantage of being in a lower tax bracket at the time of eventual withdrawal vs. the bracket at the time of deferral.

Interestingly, there is no benefit to using a Roth vs. a deductible IRA if you end up in the same tax bracket at the time of withdrawal. Here's an example:

Earn $1,000
Tax bracket at time of contribution and withdrawal 30%
20 years
Investment return 8%

Deductible IRA: Invest $1,000, withdraw $4,661, pay tax at 30%, net $3,263

Roth IRA: Invest $700, withdraw $3,263 tax-free

Of course, you could put in the same $1,000, but you'd have to earn an additional $429 to do it.

What about the choice between a non-deductible traditional IRA and a Roth? No contest -- Roth wins hands down.

The general order of preference for most is:

1. 401k

and

2. Deductible IRA

3. Roth

then, regular taxable innvestment

Everything depends on what you qualify for under the Code, how much you can save, and what your expectations are for the future.

-- posted by Rande