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November 23, 2009


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Another benefit of the Roth conversion is that it is equivalent to sheltering an extra $X, where $X is the tax you pay for the conversion.

Here is an example:
Start with $1000 in tax account $4000 in a standard IRA. Assume invest both for 5 years getting 8%/year.
$1000 becomes $1,469.33 before taxes and $1399 (only gains are taxed at long term rate of 15%)
$4000 becomes $ 5,877.31 before taxes and $4408 (entire amount is taxed)
After Tax Value: $5807

Use $1000 to pay conversion taxes to put $4000 into a Roth IRA, again invest for 5 years getting 8%/year.
$4000-> $ 5,877.31 no taxes are due.

The Roth solution is worth $70.31 more, which is EXACTLY the amount of tax paid on $1000 invested outside of a retirement account.

-Rick Francis

Yikes, I still find this confusing. I have a traditional IRA that I paid into for a few years beginning over 20 yrs ago. Its value has increased 8-fold from what I originally put in. My financial adviser said I'd lose almost 50% of it to taxes if I converted it into a Roth, so I'm just leaving it alone for now--any better advice? I'm 48 and not currently in a low tax bracket nor do I expect to be after I retire.

MC --

I agree -- what to do isn't clear. The good news is that we have a year to figure it out. I'll be writing more about it in 2010 as I try to figure out myself what action to take.

If my traditional IRA is funded with money I've already paid taxes on (no deduction claimed), then I won't have any taxes due upon conversion. Is this correct? Or, would I pay taxes on the earnings?
Also, will I be able to continue to contribute to the Roth IRA in future years, or is this a one-time conversion?
Thank you!

I am happy to have this opportunity for the first time, but do not look forward to paying taxes on converting. I'm looking to convert about $20K. Is this just added to my taxable income for 2010? I'm trying to reduce my taxable income not increase it.

Rick Francis, wouldn't your math be incorrect if you are in a 15% tax bracket now, but plan to be in a high tax bracket in the future...

If you are in the same exact tax bracket, it seems it just doesn't matter.

You'd pay taxes on the earnings, but the principal would convert tax-free.

You may contribute to the Roth in future years, and I believe you'll be allowed further Roth conversions (subject to limits on both the amount and your income) even.

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