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March 19, 2010


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Just to be sure I understand - the benefit of a recharacterization is if your investment falls in value, you can recharacterize and then after waiting the prescribed time, reconvert at a lower value (and hence a lower tax)?

Obviously, the recharacerization doesn't undo the loss of money :)

I'm just not convinced that converting my traditional IRA to a Roth makes sense. I think the only people that should do this are people that can't otherwise contribute to a Roth because the make too much. Think of it like this, right now most FMF readers are probably in a tax bracket higher than 15%. To fill up that lowest bracket after you retire (assuming you are using your trad IRA funds at 4% withdrawal) you would need a balance of $2.2M in today's dollars. Also, what happens if the tax hikes are of the VAT or sales tax variety? Or if Roth rules are changed? Don't think that the US government is below taxing money twice (Corporations and dividends come to mind). I definitely max my Roth contributions each year, but my IRA is staying where it is.

When IRAs came out many years ago the idea was to POSTPONE paying taxes to Uncle Sam as long as possible. The idea being that it was better to keep you money working for you now, and pay Uncle Sam later with dollars that are worth LESS(due to inflation).

I'm sure there are instances where it makes sense to convert an IRA to a Roth.

I'm not converting any of my IRAs. I think we have lots of inflation headed our way in the years to come. I agree with Ryan's post in that the tax code could and probably will change in the future. There's a ton of money in IRAs around the country. The government is salivating at the opportunity to get their hands on it. Converting to a Roth plays right into the government's hand!

I am 50 years old. I'm holding on to my money as long as possible. Never pay a tax today that you can pay with cheaper dollars tomorrow.

When do you do the Roth conversion, make sure you have enough funds to pay the taxes upfront. For example, a taxpayer in the 28 percent federal tax bracket who shifts $100,000 of pretax dollars to a Roth IRA from a traditional IRA would pay $28,000 in taxes, in addition to whatever is owed in state taxes. “There are many people who simply don’t have that kind of a side account to pay the income tax, so for them it isn’t very practical to consider a Roth,” said Christine Fahlund, a senior financial planner at T. Rowe Price Group Inc. in Baltimore.

A partial conversion to a Roth IRA from a traditional IRA may be the most tax-efficient plan because of the diversification benefits, said Orecchio, who estimates about half of his clients may convert some money to a Roth IRA next year. “You never know how the tax code will work in the future. By owning different IRAs, you’re protected from whatever the government might decide to do,” Orecchio said.

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