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    Conversion to a Roth IRA

    Any CFPs / Accountants in the house?

    I'm wondering if converting my Traditional IRA to a Roth makes sense. My IRA has been around for a long time - the tax penalty of converting will cost over 80 grand - even if I spread that over two years, that's still a costly penalty and it will reduce my IRA significantly - like 28%.

    1. Does this make sense if I want to retire in 10-years?

    2. Won't I be in a ~20% tax bracket if I retire (no income except IRA & pension distributions) ?? Or will taxes continue going up astronomically in the future?


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    Re: Conversion to a Roth IRA

    Quote Originally Posted by Go2Guy View Post
    Any CFPs / Accountants in the house?

    I'm wondering if converting my Traditional IRA to a Roth makes sense. My IRA has been around for a long time - the tax penalty of converting will cost over 80 grand - even if I spread that over two years, that's still a costly penalty and it will reduce my IRA significantly - like 28%.

    1. Does this make sense if I want to retire in 10-years?

    2. Won't I be in a ~20% tax bracket if I retire (no income except IRA & pension distributions) ?? Or will taxes continue going up astronomically in the future?
    At this point, probably not worth it. Assuming you have gradually worked your way up to the higher of the tax brackets, you have essentially deferred paying taxes until you have reached your potentially highest taxing potential (assuming you made the contributions while you were in lower tax brackets and now you would bring those original contributions on as taxable income all in one year at your highest taxing point). Also not worth it if you expect a drop in your taxable income after retirement.



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    Re: Conversion to a Roth IRA

    I agree, if you are that close to retirement it just doesn't seem worth it..because once you convert it you still have to not w/d anything for at least 5 years or until you are 59 1/2 whichever is later...



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    Re: Conversion to a Roth IRA

    Quote Originally Posted by CycloneCPA View Post
    Also not worth it if you expect a drop in your taxable income after retirement.
    Exactly - thanks for your input. Aren't most retired folks in a 15-20% bracket?
    The only boogie is if our government continues raising taxes and/or the tax bracket.


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    Re: Conversion to a Roth IRA

    First off - edumacate yourself. A few quick searches should bring up a couple good articles to start with.

    The Key: Will tax rates be higher years from now when you 'retire' or take your $ out of the IRA? If you could convert while not moving up a tax bracket to pay the tax, that could be beneficial. I think a lot of younger people may not have any taxes, as their Roth's will contain losses.

    Obviously, you would expect to increase your income as your career progresses. Your salary would increase as you rise in the ranks (until you become too expensive & the company axes you - ha!), or your business you operate grows and you take out more income (or maybe you don't, for this reason), you would expect to move up in the tax brackets.

    This is something I've been pondering - for my wife's, not mine.



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    Re: Conversion to a Roth IRA

    Correct me if I'm wrong CycloneCPA, but won't he want to have cash on hand to pay the tax as well? Isn't there a 10% penalty on the tax money he takes out too?


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    Re: Conversion to a Roth IRA

    It probably isn't worth converting, especially if you are in a fairly high tax bracket right now. I don't think the 5 year deal is important to you, since it sounds like you are planning not to withdrawal until after 59.5 anyway. The main reason that people are converting these now is that they are assuming that one of these days the government is going to tax the crap out of everyone that has any money, which I tend to agree with. Someday, someone has to pay for all the spending that has been going on, but that thought belongs on the political board..........



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    Re: Conversion to a Roth IRA

    Sounds like it's not worth it, probably better putting as much as you can in a Routh from here on out. Actually, probably better asking a professional than us knuckleheads on CF.



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    Re: Conversion to a Roth IRA

    Quote Originally Posted by wartknight View Post
    Correct me if I'm wrong CycloneCPA, but won't he want to have cash on hand to pay the tax as well? Isn't there a 10% penalty on the tax money he takes out too?
    There is no penalty for converting a traditional to a ROTH. The penalties are for taking an early withdrawal and using it for other purposes. Even then there are some exceptions that can be claimed for first time home buyer, education expenses, etc. This is all on form 5329.

    What you need to pay for is the tax on the value of the IRA converted, since you were allowed to make the contributions to a traditional IRA with pre-tax dollars, and the distrubutions from the ROTH will not be taxable later.



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    Re: Conversion to a Roth IRA

    If you would have done it last March, then it makes sense. Now with the market up 50% since March - the window has closed.

    If you have monies outside of your IRA you can use to pay the taxes, then it may make sense. There are a lot of good articles out there that explain the benefits.

    Summary: If you think the stock market can make a big run in the next 5-10 years (double or more), then it may be worth it if you can pay the taxes outside of IRA funds.



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    Re: Conversion to a Roth IRA

    Quote Originally Posted by CyCloned View Post
    There is no penalty for converting a traditional to a ROTH. The penalties are for taking an early withdrawal and using it for other purposes. Even then there are some exceptions that can be claimed for first time home buyer, education expenses, etc. This is all on form 5329.

    What you need to pay for is the tax on the value of the IRA converted, since you were allowed to make the contributions to a traditional IRA with pre-tax dollars, and the distrubutions from the ROTH will not be taxable later.
    I think the OP was thinking about paying the taxes with funds from his IRA - in which case he would have to take a distribution which would incur the penalty.



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    Re: Conversion to a Roth IRA

    Really the main thing i think that the Roth conversion is good for now, is that because of the down market the past few years a lot of people have lost upwards to 50% of their IRA's, so w/ their values being so far down and w/ the ability to spread the taxes out for 2 years, it would be smart to do the conversion...



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    Re: Conversion to a Roth IRA

    The thing about Roth IRA's is that there isn't a guarantee that gains won't be taxable in the future. Keep in mind that Social Security payments were tax-free before 1984. Roth gains might be a very tempting target down the road. Just something to consider.


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    Re: Conversion to a Roth IRA

    Quote Originally Posted by crooksie_26 View Post
    Really the main thing i think that the Roth conversion is good for now, is that because of the down market the past few years a lot of people have lost upwards to 50% of their IRA's, so w/ their values being so far down and w/ the ability to spread the taxes out for 2 years, it would be smart to do the conversion...
    You're right on the reasons for a conversion, but I disagree with your conclusion. If you're taking a distribution to pay the taxes it will rarely make sense. You're reducing the balance in your account by the amount of the taxes which, assuming a constant tax rate, eliminates all of the benefit of converting because you now are earning a return on a much smaller investment. Not only that, but you eat a 10% penalty which makes this a losing proposition barring a significantly higher tax rate during retirement.


    Last edited by azepp; 02-26-2010 at 08:28 PM.

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    Re: Conversion to a Roth IRA

    Quote Originally Posted by kilgore_trout View Post
    The thing about Roth IRA's is that there isn't a guarantee that gains won't be taxable in the future. Keep in mind that Social Security payments were tax-free before 1984. Roth gains might be a very tempting target down the road. Just something to consider.
    If they do that , I think it will be pitchforks and torches time in DC. They will probably come up with a national sales tax before that happens.



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