Originally Posted by kaneohe
Another way to look at this situation (paying tax from TIRA or from outside taxable funds) is to examine the future values.
Have 10K TIRA and 2K outside funds. Assume 20% tax now and later.
1) Pay tax from TIRA. End up w/ 8K Roth and 2K outside funds. Assume values double in N yrs. Have 16K Roth and 4K- in taxable outside funds.
Total of 20K- . The - denotes the loss due to taxable drag on the outside funds.
2) Pay tax from outside funds. End up with 10K Roth.
Assume values double. Have 20K in Roth .
The two scenarios suggest that paying from outside funds, ending value >= to paying from TIRA with the difference being the tax drag on the outside taxable funds.
Don't know where the 20% tax rate came from but if 15% fed/5% state, then the fed tax rate could be 0% on QDIV/LTCG so the tax drag could be quite small if invested in tax efficient index funds. Still there is an inherent bias for paying from outside funds and the difference grows with the years.
A retiree with no earned income would want to maximize his balance in the Roth as he can no longer contribute without earned income. Using funds from the TIRA to pay taxes does not maximize his ability to get the most money into his ROTH.