Converting t-IRA dollars into Roth IRA dollars

[pb4uski]

No, because early withdrawal penalties do not apply to Roth conversions.

I think the part used to pay the taxes are subject to early withdrawal penalties since they are not actually converted.

Yes, brain fart on my part.

 

[bingybear]

The idea is to move as much money from the TIRA to the Roth IRA. Using money from the TIRA to pay taxes on the conversions just means that much less you can convert next time.

For me I see it more important the measure cost of each method of conversion. For easy comparison I would like to see the same conversion amounts.

The way you describe would ignore the taxes, but these would be the same in both cases. You end up with different amount converted which I think is the point you want to show. However, the taxes paid externally are not shown as a cost for that case.

I guess I see a 10k conversion costing $12.5k (all from IRA) or $12k (taxes from after tax) more useful in my simple mind.

 

[VanWinkle]

For me I see it more important the measure cost of each method of conversion. For easy comparison I would like to see the same conversion amounts.

The way you describe would ignore the taxes, but these would be the same in both cases. You end up with different amount converted which I think is the point you want to show. However, the taxes paid externally are not shown as a cost for that case.

I guess I see a 10k conversion costing $12.5k (all from IRA) or $12k (taxes from after tax) more useful in my simple mind.

Agreed

VW

 

[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.

 

[43210]

^ 20% is a standard amount withheld (in certain circumstances) which may be more or less than the final tax due.

 

[VanWinkle]

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.

VW

 

[kaneohe]

^ 20% is a standard amount withheld (in certain circumstances) which may be more or less than the final tax due.

Thanks. You can opt out of w/h if you want .

 

[43210]

Thanks. You can opt out of w/h if you want .

Exactly. Hence the discussion why people should.