Comments on: Understanding Roth IRA Conversions

By: Renee

Renee — Mon, 24 May 2010 19:18:14 +0000

I think there’s a lot of pros and cons to converting to a Roth IRA.

1 like

By: Carl Folke Henschen Edman

Carl Folke Henschen Edman — Wed, 07 Apr 2010 18:10:12 +0000

@ibar Look up “commutative property of multiplication” some time.

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By: JOHN W

JOHN W — Sat, 19 Dec 2009 23:57:50 +0000

Don’t forget the time value of money. Roth allows taxable income to grow tax free, while traditional IRAs defers tax on income, which becomes taxable when withdrawn. In a traditional IRA the amount of the avoided tax can grow tax deferred

By: Matt

Matt — Sat, 19 Dec 2009 14:42:13 +0000

Other advantages or a Roth:
1) No RMDs are required for a Roth
2) Tax free withdraws in retirement do not affect taxation of social security
3) Withdraws are tax free no matter how large unlike withdraws from an IRA that are affected by our progressive tax rates. For example, depending on other income a person has for the year, a lump sum 50,000 withdraw is taxed at a higher effective rate than a 5,000 withdraw.

So the argument that there is no advantage only holds true if from start to lump sum withdraw, assuming the lump sum withdraw (on Trad IRA) will be taxed at the same rate as was fogone on the Roth contrib.

By: Connie

Connie — Tue, 15 Sep 2009 17:59:50 +0000

“a Roth has no advantage over a traditional IRA.”

Agreed, Frank is making too many assumptions here. This may be true for his personal situation, but it isn’t true for everyone.

The basics of this change is that it takes away the Conversion Limit. If one is already inhibited by the Conversion Limit and the Roth Income Limit, then they are probably making non-deductable contributions to their Traditional IRA due to to the Deductable Limit. Meaning, they have already paid tax on the money deposited. If this is the case, then they would just be paying tax on any Capital Gains at time of conversion, not the whole account balance.

Now, add the “market’s extended slide” mentioned in the first sentance of the article into this scenario. Even with the recent months’ recovery, some will still be looking at a negative or small Capital Gains compared to what they actually deposited into the Traditional IRA. Convert this IRA scenario over to a Roth and the owner is paying little to no tax, and all future gains are tax free.

Obviously, not everyone will benefit from this, but many will.

The one thing this article doesn’t touch on is the complicated tax scenary if one has both non-deductable and deductable Traditional and Rollover IRAs. As I understand from a finacial advisor, if one has mixed non-Roth IRAs and converts only a partial amount, it will be taxed based on the non-deductable and deductable ratio of all available accounts, not just the account converted from. This will require detailed tracking for future conversions. So, if you don’t have a simple and straight forward situation, please investigate thoroughly before converting.

By: dave

dave — Tue, 01 Sep 2009 18:34:13 +0000

“a Roth has no advantage over a traditional IRA.”

You are definitely wrong, Roth IRA have multiple advantages to traditional IRAs…

By: JS

JS — Tue, 25 Aug 2009 22:08:27 +0000

@ibar In your example the results would be the same. When you pay the $2,500 in taxes upfront you forgo the opportunity to earn interest on this, which in your example, would make this amount equal to $250,000 or the same amount you would pay in taxes at the end. So, based on this the only advantage to a Roth IRA is if you plan for your tax bracket to change between the time when you are converting/contributing to the time when you plan to use the money in retirement.

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By: Eden

Eden — Tue, 18 Aug 2009 17:45:34 +0000

@Frank & Mike,

You are also missing the other hidden benefit of the Roth IRA, higher effective contribution limits. Standard IRA and Roth IRA both have the same contribution cap on is in pretax dollars and the other is in post tax dollars. Say you save $400 a year using a standard IRA in tax benefits. Even if you are careful and invest this money in a taxable account, its growth will not be tax free, unlike the $400 effective extra you have in the Roth IRA.

So if you can max out your IRA, maxing out a Roth IRA is always the better choice.

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By: ibar

ibar — Sun, 16 Aug 2009 17:00:12 +0000

@ Frank and Mike,
You guys are assuming you had no return on the funds in the investment account. The beauty of the Roth is that it grows tax free and you can take it out tax free. Suppose you started with one investment at $10,000 and, in an extreme example, your one investment returns $1,000,000 by the time you retire. If you did not convert, you would have to pay $250,000 in taxes (assuming 25% tax rate on gains/dividends/income etc) versus $2,500 in taxes when you convert it when the account balance is $10,000.

cheers.

By: Joyce Bone

Joyce Bone — Wed, 12 Aug 2009 18:09:48 +0000

Don’t you just love a great debate? Thanks to Michael B. Rubin for writing this as many people can benefit from reading it. Also, enjoyed reading the other comments and points of view. I’ll be sure to share many articles from Mint with my members at http://www.millionairemoms.com.

Appreciate it!

Joyce Bone