Fido Adviser Doesn't Think I Should Do Roth Conversions/ (huh?)

[GrayHare]

Not sure what you are getting at here. The post-tax $ in a tIRA are not taxed even if you don't convert to a Roth. The post-tax $'s is called the 'basis', and is recorded each year on form 8606 (line 14). When you make withdrawals from the tIRA's the $'s coming from the basis are not taxed.

It's true post-tax dollars won't be taxed if left in a tIRA, but their earnings will upon withdrawal. Conversely earnings on those same dollars in a Roth won't be taxed.

Someone might quickly look at their $100k tIRA and decide not to convert to Roth because they think the whole $100k will be taxed upon conversion. But if half of that tIRA was non-deductable contribs (i.e. post-tax dollars), then only $50k will be subject to tax upon converting to Roth. Such conversion releases the post-tax half to grow tax-free, which over time can more than offset any tax paid for converting the pre-tax half.

 

[Alan]

It's true post-tax dollars won't be taxed if left in a tIRA, but their earnings will upon withdrawal. Conversely earnings on those same dollars in a Roth won't be taxed.

Someone might quickly look at their $100k tIRA and decide not to convert to Roth because they think the whole $100k will be taxed upon conversion. But if half of that tIRA was non-deductable contribs (i.e. post-tax dollars), then only $50k will be subject to tax upon converting to Roth. Such conversion releases the post-tax half to grow tax-free, which over time can more than offset any tax paid for converting the pre-tax half.

If your tax rates don't change then it doesn't matter if you convert now or later.

In your example suppose you are in the 25% tax bracket. If you convert now you pay $10k in taxes and the remaining $40k grows tax free.

Suppose it doubles in value before you withdraw it - you get $80k

If you don't convert it, the $50k will still double in value, to $100k, and you pay 25% tax when you withdraw it, leaving you with $80k

 

[GrayHare]

Hmm, well, my calcs say the Roth comes out ahead. Example $100k tIRA, half post-tax contribs, 25% tax rate:

1) Don't convert to Roth, $100k doubles over time to $200k, of which $150,000 is taxable @ 25%. That's $37,500 in tax, reducing the tIRA to $162,500 after tax.

2) Or, convert to Roth now, pay 25% tax on $50k pre-tax portion, which is $12,500, leaving $87,500 to double over time to $175,000 after tax in the Roth.

Option 2 calculates as if the tax was paid with IRA dollars. Option 2's Roth conversion comes out even further ahead if the tax is paid with non-IRA dollars.

 

[Alan]

Hmm, well, my calcs say the Roth comes out ahead. Example $100k tIRA, half post-tax contribs, 25% tax rate:

1) Don't convert to Roth, $100k doubles over time to $200k, of which $150,000 is taxable @ 25%. That's $37,500 in tax, reducing the tIRA to $162,500 after tax.

2) Or, convert to Roth now, pay 25% tax on $50k pre-tax portion, which is $12,500, leaving $87,500 to double over time to $175,000 after tax in the Roth.

Option 2 calculates as if the tax was paid with IRA dollars. Option 2's Roth conversion comes out even further ahead if the tax is paid with non-IRA dollars.

I agree that your calculation shows that the Roth conversion is better even if the tax rates stay the same. Thanks.

Makes me pleased that I converted the whole of my tIRA to a Roth in 2010. I now only have the Rollover IRA from my 401k in 2011 left to worry about.