Roth IRA Question

[friar1610]

I've already concluded that it doesn't make sense to roll the entire (joint) IRA into a Roth.

Background: about $350K in IRAs. Most of it is from my wife's and my 401K/403B plans which were put in a Rollover IRA when we stopped working for good. About $50K is from pre-tax traditional IRA contributions.

It seems to me that if we took the difference between our expected income for 2009 (which I can compute fairly accurately) and the upper limit of our tax bracket (25%) and moved that much money out of our IRA's into a Roth it would make sense. We have the cash to pay the tax from other than the IRA money. We would pay about 21.5% on the rollover amount (because about 15% of it is in pre-tax money.) We would have the chance to have the rolled over money earn (or lose) for the foreseeable future. And since taxes aren't going down in the future, we would lock in our current tax rate. (Our bracket isn't likely to go down in the future.)

We would look at doing the same next year and again the year after if it made sense. Ideally, we would live long enough to get it all out of the current IRAs into Roths.

What might I be missing?

 

[friar1610]

I should have mentioned that we're both retired and in our mid-60's.

 

[harley]

IMHO it depends on what you are trying to accomplish. Personally, I agree with you. Taxes will be going up. Based on that alone I think you would be making the right decision. But are you going to be drawing on that money in the near future? If so, I'm not sure you'll be gaining much. Taxes will (IMHO again) be going up, but how soon and how much? If, OTOH, you are hoping to use this as an estate planning tool, I think it's an excellent choice. But make sure the recipient know how to react when they recieve it. You want them to stretch the withdrawals out over their life time, not take it out in one big chunk. Things like that. I think converting to a Roth is a no brainer, but I know others don't. The only reason I can think of is that they've forgotten those 40-90% tax brakets.

 

[mathjak107]

many sides to consider.... whether taxes go up or not, just the growth of your tira will have the same effect . think how much less cash it would have cost you to convert last march.

your ira has a mortgage on it and unlike your house you have no idea what your partner uncle sam will take as his share.

i wasnt going to convert next year but after reading ed slotts books its in my best interest to do it and do it as fast as possible.

we know the share uncle sam will take now and historically its the lowest in our history. no point risking he will leave us with crumbs again.


the passing on of your money to your heirs is where it really shines. its small potatoes whether taxes go up or down compared to the legacy benefits of converting now.

 

[Independent]

I'm much like you. I'm not trying to guess what the gov't will do to future tax rates. But I know that once I start taking SS and RMD's under current law I'll most likely be in a 25% bracket. Makes sense to pay the 15% today, I really doubt my tax rates will ever be lower than this.

I also like the flexibility. Since I don't know what the future will bring, having some money in a Traditional IRA and some in a Roth seems to give me choices down the road.

 

[BUM]

Hi Friar, we are in a very similar situation. After consulting VG I've decided to slowly convert to a ROTH. Of all the discussion, number crunching, wading thru IRS forms, the thing that was most memorable is this. Think of your growing ROTH as a portfolio diversification. I think tax rates will be higher in the future and I want to get the taxes paid off. If I'm wrong or my tax situation becomes volatile, I'll have two accounts to tap. If taxes are high, I'll tap the ROTH. If taxes are affordable, I'll tap whats left of the TRAD IRA.

Also do the math annually when deciding how much to convert. Just convert the amount that doesn't push you into a higher tax bracket. Also consider the possibility of triggering estimated tax requirements. Not that I'd do it, but it might be worth paying a CPA by the hour to guide you.

 

[LOL!]

I don't understand what the OP said about 15% of it being pre-tax money. If it is pre-tax, that means it was a deductible contribution. That means ALL of it is taxable when it comes out. That is

About $50K is from pre-tax traditional IRA contributions.

is all taxable when it comes out.

 

[Lsbcal]

Once you have a decent sized Roth there is another investment tactic that is possible. Assuming you have accounts in both an IRA and a Roth you can vary the equity/bond ratios over time. For instance, this year as the market got very low and began to recover you could have increased the equities in your Roth and simultaneously reduced them in the IRA. I've recently modified our investments so that it is fairly easy with the aid of a spreadsheet to do this. You don't have to time things perfectly to do this. If equities go down in the IRA at least some of that loss will be indirectly picked up by Uncle Sam as you take withdrawals. If equities go up in a Roth you get to keep it all for spending.