Roth IRA Conversion Will Never Look Better

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MB. You misunderstand. You only need to compare the after-tax payouts in retirement to determine which is better. The $28,000 tax cost of the conversion is included in the Roth payout.
Furthermore, this person is better off converting to a Roth no matter how long he lives past 70.

Brad of CA 7:11PM June 01, 2011

I have some money commingled in a traditional IRA. The commingled money includes some contributions that were funded on after tax dollars (I filed a 8606) for several years. These post tax contributions make up just a small fraction of my total traditional IRA. Can I move only the post tax contributions into a Roth IRA and owe no addtional taxes, or am I screwed because, if the post tax contributions are 5%, I must prorate the transfer?

mw of DC 11:17AM April 28, 2010

If we change to a Roth now and take the $28,000 hit, we could be faced with "income" tax staying the same and a VAT coming along to harvest more of our money.

Harry Hanbury of FL 9:55AM April 22, 2010

From the article:
"At age 50 in 2010, converting to a Roth would cost $28,000 in 2010 taxes and provide post-tax income of $21,290 a year in retirement, compared with $18,590 for a traditional IRA."
So..from ages 70-90 I'd be +$2700 ahead of the game per year. That is only worth $12,681.57 in 2010 dollars (using 5% discount rate.)
mmmmmm.....looks like a bad deal. You're paying $28,000 in 2010 taxes for future benefits that are only worth $12,681.57 in 2010. An even worse deal if I die before age 90 (pretty likely.)

MB of CA 10:34PM April 06, 2010

Most articles written on the Roth IRA conversion are flawed and this one is no different. In addition to the items mentioned above, an additional 100k in income divided over two years will likely push people into a higher tax bracket and even subject them to the AMT. Also, this article and most models do not consider state income taxes. Finally, the calculators that I have seen assume that all IRA monies with be withdrawn in the first year of retirement, which is likely a flawed assumption. More people are likely to withdraw over time.

mj of NY 4:00PM April 06, 2010

Flawed comparison calculation - where did the 28K to pay the taxes come from??? If from other cash on hand then it was not included as saved and invested to provide additional income. A concept called opportunity cost.
The only thing that matters is "TAX RATES" - whether they are higher or lower when you conribute or withdraw. Foeget the calcualtors. $100 gross now contributed to regular IRA NETS the same as $100-tax contributed to a Roth IF the tax rates are the same - what ROI or timeframe is involved is irrelavant!!!!!!!!!

CheshireProfessor of MA 11:35AM April 06, 2010

If the traditional IRA holder passes away before 70 1/2 (sadly it's 30% of chance), all the money in IRA goes into his/her estate, and if it is below $3.5million, all the money is tax free for his/her spouse and children.

roth ira of CA 4:55PM March 29, 2010

I hate articles like this. Look at the assumptions. A 28% bracket now and a 33% bracket after retirement? To be in a 28% bracket in 2010 married filing jointly you have a taxable income of $137,000-209,000. To be in a 33% bracket and married you have to have taxable income (this is after all deductions) of 209,000-$373,000. That puts you in the top 1-2% of earners in the US. So the other 98% of us PLEASE DON'T READ THIS. And even further, He cites an IRA distribution of $13,000-$34,000 per year that will be taxed at 33%. To be taxed at 33% you need to have total taxable income of $210,000+ which begs the question of where is the other $150-$175,000 of taxable income DURING RETIREMENT coming from.
Really this kind of article does nothing but confuse people who don't know better. It is better not written.

tommy of CO 4:42PM March 29, 2010

#1. Wrong assumption -- What do you think my tax rate at age of 70 1/2, same as mine today? Why would I still work at 70 1/2, unless I'd be super crazy of working?
#2. Wong calculation -- Without post-tax money, the conversion is DEFINITELY a bad deal. With post-tax money, it could be a good deal if I'll be on the same or high tax rate at age 70 1/2, but unlikely due to #1.
#3. Still not a good deal --- The money you lose today (paying the conversion taxes) is the money you definitely lost. The money you may save by converting in 30~40 years is a question mark. In 30~40 years, many things can change. Why take the risks?

Roth IRA of CA 4:40PM March 29, 2010

Hey, Richard. The comparisons REFLECT the tax hit taken on the Roth conversions. So, in the 10 years from age 60 to 70, the $72,000 of your Roth ($100,000 minus the $28,000 tax bite) will have risen enough to produce annual income of $13,070 for 20 years. Over the same time span, the $100,000 taxable IRA produces annual after-tax income of only $11,681.

Phil of VA 2:15PM March 26, 2010