Convert to Roth... or Not?

[retiringby50]

I didn't work in 1997, so right around 4/14/1998, my accountant sent me to open an IRA (for 1997). I think it was for $2,000 or whatever the limit was. For a while, the fund didn't do well, but I just noticed that my $2K is now a little over $5K.

Is it worth converting to a Roth IRA? I guess I would have to pay taxes on the $3K profits, so I would do this in 2008 anyway since I think my income next year will be a little less than this year. But paying taxes on $3K now is going to be better than paying taxes on something much higher later, like $12K in 2037, right?

Any other info I need to take into consideration?

Thanks.

 

[Alan]

Is it worth converting to a Roth IRA? I guess I would have to pay taxes on the $3K profits, so I would do this in 2008 anyway since I think my income next year will be a little less than this year. But paying taxes on $3K now is going to be better than paying taxes on something much higher later, like $12K in 2037, right?

Right!!

 

[cute fuzzy bunny]

I guess the tough question is whether tax law will change between now and 2037.

Will income from IRA's be given special tax treatment?

Will a national sales tax be put in place?

That sort of thing. It'd suck to pay current income taxes on the money to convert and then end up paying a national sales tax 30 years from now...

We're split. We're not converting old IRA's, but all of our new contributions are going to Roths. We'll end up with almost even amounts in each by the time we're in our 60's.

 

[mickeyd]

Is it worth converting to a Roth IRA? I guess I would have to pay taxes on the $3K profits,

You will have to pay taxes on all of it, not just the growth. Due to the relatively small amount, I would consider converting 100% to a Roth and never have to worry about taxes again on this money.

 

[RunningBum]

1) If this was a pre-tax IRA (you never paid taxes on the first 2000), you're going to be taxed on the full $5000, not just the profit.

2) If you can pay the taxes out of your pocket, not out of the $5000, I think you come ahead with the Roth conversion, though point 3 could change it.

3) Otherwise the only difference will be which tax bracket you are in now vs. which tax bracket you'll be in when you take it out. Take it out when you think you'll be in the lower bracket.

 

[retiringby50]

You will have to pay taxes on all of it, not just the growth.

Oh yeah, I forgot about this part! Except for the part about possible legislative changes... I think I'll convert. Thanks!

 

[mathjak107]

no roth for me. i cant ever imagine i would be in a higher tax bracket with no pay check when i retire.

tax brackets are constantling extending upward by about 3% a year allowing more and more income at lower rates

you can pull over 30k a year from retirement money and pay as little as 1500 bucks in taxes when retired

i would never plan around speculating about what may be off in the future , i base the bulk of a plan for what i know is actually happening and true now.

and never forget at 80 million strong any political party will have to do whats right tax wise for the baby boomers. the rest of the working stuffs may get slammed but i highly doubt any party will tell us they are rasing taxes on retires.

 

[waltwill8]

I have basically everything in traditional IRA's. I struggle with balancing current withdrawel/conversion to Roth vs. Minimum required distributions at 70 1/2. I am trending to leave it alone. I guess it depends on how well my investments do. If I'm rich enough at that point, I won't care

 

[mathjak107]

i plan on spending down my ira's first ,reducing the amount of the mandatory distributions later on. even a 72t election could be used to start to dwindle the ira's down

 

[Nords]

http://www.early-retirement.org/for...ld-i-convert-my-ira-401-k-roth-not-30664.html

 

[TromboneAl]

I'm converting $10,000 this year, and I will pay only $169 in taxes on that conversion. Income essentially zero, and there are offsetting education credits.

 

[Alan]

But paying taxes on $3K now is going to be better than paying taxes on something much higher later, like $12K in 2037, right?

Tax brackets do go up, but tax rates will probably go up as they are very low now, plus, with 30 years growth ahead of your plans, I think converting to a Roth now is worth it, since all the growth will be tax free.

 

[aenlighten]

The only two reasons to convert to a Roth

are a higher tax bracket in the future, and wanting to leave an estate to heirs. The only reason to leave it in a traditional is a lower tax bracket in the future. No change in taxes means no preference, though it can matter what other income sources you might have in the future since paying them now would be at the marginal rate while they could be at the gross rate in the future without other income.

 

[mathjak107]

Tax brackets do go up, but tax rates will probably go up as they are very low now, plus, with 30 years growth ahead of your plans, I think converting to a Roth now is worth it, since all the growth will be tax free.

if tax rates are the same the taxes including the growth are the same. makes no difference . the difference is whether you think you will be in a higher tax bracket when you stop getting a pay check. dont forget for the last 40 years tax rates have been dropping. if you want to bet that will change than go for the roth

 

[bamsphd]

No change in taxes means no preference,

if tax rates are the same the taxes including the growth are the same. makes no difference .

I disagree. If tax rates are the same, then converting is equivalent to depositing the conversion tax money into the traditional IRA.

Given a choice between $5,000 in a T-IRA or $5,000 in a Roth IRA, I'll take the $5,000 Roth IRA every time.

 

[BigBob]

I believe that still in '07 there are income limits (100K?) for conversions. I believe this goes away in '10 for a couple years. Martha had a link to a spreadsheet of all of these dates/limits/details (can't seem to find it now). I am going the "tax-diversification" route with a end-goal of on the order of 1/3 taxable account, 1/3 tax-deferred account, and 1/3 Roth non-taxable.
Also, keep in mind that if you convert, say in January '08 when your balance is $5K, then the market tanks throughout the year and now your converted Roth balance is only $2K, you can recharacterize it back to a T-IRA and treat it as if nothing happened. If the market explodes during the year and your balance becomes $8K, then you are even more ahead having converted because you now have $8K in your Roth. Just a thought.

 

[packrat44]

I didn't work in 1997, so right around 4/14/1998, my accountant sent me to open an IRA (for 1997). I think it was for $2,000 or whatever the limit was.
Any other info I need to take into consideration?

Thanks.

If you did not work in 1997, how did your accoutant figure you were you eligble to open an IRA for 1997 (unless it was a spousal IRA)?

 

[mathjak107]

I disagree. If tax rates are the same, then converting is equivalent to depositing the conversion tax money into the traditional IRA.

Given a choice between $5,000 in a T-IRA or $5,000 in a Roth IRA, I'll take the $5,000 Roth IRA every time.

you need to have started with far more than the 5,000 to have 5,000 in the roth . 8,000 in a deductable ira would equal 5,000 in a roth in my case.

 

[packrat44]

i would never plan around speculating about what may be off in the future , i base the bulk of a plan for what i know is actually happening and true now.

and never forget at 80 million strong any political party will have to do whats right tax wise for the baby boomers. the rest of the working stuffs may get slammed but i highly doubt any party will tell us they are rasing taxes on retires.

While you say you would never speculate about the future you go on to speculate in your next paragraph.

While you can not imagine yourself being in a higher tax bracket upon retirement does not mean others will not be in that situation. Everyone needs to evaluate all the particulars regarding their own situation and make the best decision with what information they have.

 

[mathjak107]

thats why it says "i"........ i can't speak for others but to tell you the truth i can't imagine 90% of americans being in a higher tax bracket not working than working. and 40 years of dropping tax rates isnt speculating about whats to come . i think if i thought my rate would be higher that would be a speculation. most of us are in our peak earning years now working.

while brackets on the highest earning tax payors may go up the 15% probley will not. in fact right now the 15% tax bracket is around 63700. and rises by almost 3% a year. in fact dont confuse marginal tax rates with nominal. you can earn 80,000 right now and the first 63700 is still only 15%.

 

[Lsbcal]

I'm not sure if it was mentioned, but I'd definitely convert if in a 15% or under tax bracket. Above that I'm not so sure.

 

[TromboneAl]

There are online calculators in which you put in your info, and it tells you what you'd end up with for Conversion vs. Not.

Also, consider whether there will be some point at which you are in a low tax bracket. For example, you are living off taxable savings, as I'm doing now. If so, you can do your converting then.

 

[mathjak107]

you have to figure anytime our gov't gives us something you know the odds arent in your favor. they would love nothing more than to give us all the opportunity to convert to roths or put our money in roth 401ks or roth ira,s. they know statistically most of america will be in lower tax brackets when they retire. even if you stay the same they are loosing 3% a year in your tax money as your bracket increases. allowing more income in the 0-10% bracket. remember marginaly your brkt may hit 25% but most of your income may be at a nominal rate of 15% . ill hold on to all my 401k money and ira money and let the full amount compound vs saying goodbye to a 1/3 converting thank you paying taxes on money i may never owe taxes on.

for someone who may be at the beginning of their working life and in the 10%-15 % bracket roths make sense if they see their income as at the low of their career . at a deductable 10% or 15% it may not pay to take the write off now and the roth makes better sense

like i said my plan will be to spend my iras first dwindling them down thru the early years so the mandatory distributions are lower. even a 72t election would probley work out way better than a roth for most of america .

 

[Lsbcal]

During our working life my wife and I both funded our retirement plan options to the max. When I ER'd the 401k and company deferred retirement money was rolled over to an IRA. Now we have much more money in IRA's and Roth's then taxable savings. This gives us a nice low tax profile. We can make changes to our investment accounts without worrying about taxable gains until withdrawal.

I've converted the max amount to Roth's each year. Probably won't start taking SS for another 6 years. This coming year I won't convert to Roth's since in 2008-2010 the cap gain rate is zero up to the top of the 15% bracket (see this http://www.early-retirement.org/forums/f28/zero-rate-ap-gains-2008-please-check-me-31953.html ).

I think this will work out over the next 10 years which is what counts for me. Who knows what may happen in the next 20 to 30 years though as far as tax law is concerned.

 

[retiringby50]

I wrote a reply but now am changing it completely. As BigBob mentioned, the household income has to be $100,000 or less, so I'm not qualified, at least not this year. Will wait till I'm unemployed again or till one of those exempt years. Thanks!