9 thoughts on “True Life: I Did a Roth Conversion

    1. I thought of that but you’d have to factor in the taxes when that $3,000 is distributed. The idea is that with the Roth IRA you maximize your purchasing power because no taxes are taken at distribution.

      1. The $3,360 taxes paid on Roth conversion would grow to PV of $25,577 in 30 years and is subject to capital gains tax or step up basis. Also, the scenario assumed the TIRA would be 100% distribution at 30 years. That is likely a higher tax bracket than if the TIRA were distributed over lifetime via RMDs.

        I think Roth makes sense if the tax bracket on a conversion is less than taxes on RMDs. If you pay 22% to convert now instead of keeping in TIRA and paying 22% tax on RMD, it’s a wash. There are other reasons for Roth, including leaving tax-free to heirs.

      2. You make a great observation on the distribution schedule of the future Traditional IRA. To keep things simplistic I went the route of a one-time distribution to demonstrate how taxes are assessed those distributions. It’s a worthwhile exercise if you believe your tax rate will be higher in the future. I am in that camp.

  1. You forgot to deduct the $3,360 you paid in taxes from the $14,000 you’re investing. There are lots of good reasons to transfer your money from a traditional IRA to a Roth IRA, especially if you believe that your present tax rate is lower than your future tax rate. But if the tax rates are the same, the math is the same.

    Here’s my situation. I have about $1 million in a traditional IRA and about $1 million in a Roth. Let’s say my effective tax rate is 30%. If I were to take the million out of my traditional IRA and put it in my Roth, I’d pay about $300,000 in taxes. So then I’d have $1.7 million in my retirement accounts. Let’s say my CAGR is 10%. In ten years, I’d have $4.4 million.

    Now let’s say I just leave my IRAs alone. In ten years, I’d have $5.2 million. Let’s say I withdraw that at the SAME TAX RATE AS NOW. I’d pay no taxes on the $2.6 million in my Roth but I’d pay 30% tax on the $2.6 million in my traditional IRA. That leaves me with . . . yes, $4.4 million. The exact same amount.

    1. It was intentional not to factor the taxes out of the $14k. Those dollars will be paid with money sitting in a savings account so I can maximize the amount converted. Your point on tax rates staying the same is valid which is why Roth Conversions are not a one size fits all solution. In my personal case, I believe my tax rate will go up overtime as I grow in my career and I also believe that income tax rates are at historical lows and will only go up in the future.

    2. Yuval,

      First, congratulations in being in the position of having reached the rarified position, financially, that 98% of Americans will never reach!

      Your reasoning is sound, however you have to ask yourself a question or two.

      1. Do you REALLY believe that Congress will forgo raising taxes, considering the Trillions they are spending today, to buy votes and pay off the liberal states responsible for their election, under the guise of COVID Relief? Your comparison assumes taxes are going to stay level.

      2. Even if you are one of those people who believes in big government, are willing to gamble on rates staying the same, when you KNOW rates today are at some of the lowest in our country’s history? Take a look at the History of US Taxes on the following link, or check Ed Slott’s new book, “The New Retirement Savings Time Bomb.”

      /Users/imac2/Library/Containers/com.apple.mail/Data/Library/Mail Downloads/9FA3B63F-DC5F-4A11-A6FB-498CFB4C9BD7/History of Top Tax Rates.pdf

      For the average American, Roth Conversions are the answer to a safer, better, stress free retirement. Smart young people, like the author of this blog, should begin stuffing as much money into Roth IRAs, and if available, Roth Elections within their 403b and 401k accounts. The traditional IRA is a trap. Its purpose has been perverted from its original use to being a slush fund for Congress and the IRS.

      While the rules are in place, maximize the benefit. Congress can and has changed the rules to suit themselves in the past, and will do so again in the future. However, when they do, they usually grandfather in past dollar amounts.

      For transparency, I am a college professor and I teach Retirement Income Planning, among other financial planning topics. I began my Roth conversion strategy in 2018, when Roth Election was added to my 403b account. While I have been paying very high taxes for 2 years and I will for 2 additional years, when I (we) retire, my wife and I will have ZERO dollars in tax deferred accounts. I (we) will still have a brokerage account with taxable income, for flexibility, and our social security income, which I waited to claim until I turned 70, last year…and we should be in the 12% tax bracket (15% after the TCJA sunsets.) Depending on what Congress does to Social Security, we may be in a tax bracket low enough to avoid any taxes on our SS Benefits, although enjoying a very low 6 figure retirement.

      All because of Roth Conversions.

      While Maureen is undoubtedly too young to remember this advertisement from Fram Oil Filters, the IRS is just like the slogan they used on TV, “Pay me now or pay me later.” I hope more young people learn the rules of the IRS game early!

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