| When to convert Traditional IRA to Roth IRA |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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Not to put too fine of a point on things, but your math, efflandt, needs a little help: if you convert $10k over to a Roth and pay $2500 in tax, the net effect is $7500, which when quadrupled equals the same $30k that the trad IRA net'ed out to.
I realize you said you were paying the tax out of current income, but the end result is precisely the same if you account for all income and investable assets - the two primary and important benefits to the Roth are 1) lack of RMD, and 2) no tax paid on withdrawals, which becomes more beneficial the higher the tax rate is in retirement (versus during your working years).
Hope this helps -
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Mon May 22, 2006 5:50 pm |
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oldguy
Senior Member
Cash: $ 309.30
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Location: arizona
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For example for every $10k I convert to the Roth, I pay $2500 out of pocket (adjusted W-4). Suppose that $10k quadruples (gains) to $40k. There is no futher tax liability on that $40k.
But you've spent $2500 out-of-pocket. OTOH, if you had kept that $2500, it would have quadrupled to $10,000. So you would have $40,000 + $10,000 of taxable funds. At age 70.5 you take them out a little at a time and pay 12% to 15%, leaving you with $42,500 net. Don't be too hasty to prepay those taxes.
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Thu May 25, 2006 10:10 pm |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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You might still be overlooking flexibility. Suppose you have major medical expenses or want to buy a new Corvette, which at that time costs $100k. If you pull $100k out of a 401k or IRA, you get socked at a much higher tax rate. If you pull that out of a Roth IRA, during retirement, it does not bump your taxes at that time.
The best approach is some of each, so you can take the required minimum distributions from 401k or IRA with standard or itemized deductions to reduce your taxs, and Roth for major lump sum expenses or pleasure.
Currently 2/3rds of my money and contributions are in a 401k, and 1/3rd is in IRA being gradually converted to Roth IRA (plus contributions) at a rate that does not increase my marginal tax bracket. I take advantage of dips in the stock market to convert IRA equities to Roth before they rebound for even better tax efficiency (tax due on closing price at conversion date, but untaxed recovery).
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Fri May 26, 2006 7:35 am |
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