Originally Posted by trapperjohn
[ I also have heard that you should not convert tIRA funds unless you have money from another source to pay the resulting taxes. In our case, we do NOT have enough additional funds to pay those taxes.
This rule pertains mostly to the pre-59.5 case where a withdrawal from TIRA to pay taxes (and not the conversion) is subject to a 10% penalty. That penalty goes away after 59.5 so doing a Roth conversion at that point using TIRA funds to pay the tax is not worse that not doing a conversion (assuming the same tax rate applies). Of course, paying the tax w/ outside funds is even better.
Ex: pre-59.5, 15% tax rate
120 TIRA------>100 Roth; pay 15% tax on 120 withdrawal = 18 plus
10% penalty on 20 not converted = 2 for total tax of 20
Assume in N yrs, Roth doubles to 200
120 TIRA left alone. Assume in N yrs, TIRA doubles to 240; pay 15% tax on
that 240 = 36, leaving after tax 204 which is slightly better than the Roth.
Ex: post 59.5, 15% tax rate
117.647 TIRA ------> 100Roth which doubles in N yrs to 200
117.647 TIRA left alone ; in N yrs doubles to 235.294 and after 15% tax,
EXERCISE of paying w/ outside funds left as exercise for OP but should result
in Roth better