8 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.

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