Nathan Liskov wrote:
- quote -

I don't believe this is true. In this case, if the money to pay the
taxes comes from the Roth and you're under 59.5 (did I get the age
right?) then an extra 10% penalty is due. If not, then P(Tin) will
certainly not grow at the same rate as the Roth, the same situation as
Rich described when deciding between maxing a Roth or a traditional IRA.

-Will

I believe that my original posting applies also to conversion of a
Traditional IRA to a Roth IRA. Just think of P as the amount of money
in your traditional IRA which can be converted to P(1-Tin) in a Roth
IRA.

Nate Liskov


"Nathan Liskov" <nate[at]lcs.mit.edu> wrote:

- quote -


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beliavsky[at]aol.com writes:

- quote -

Yes, you can. If your AGI (with a couple of modifications) is less
than $100,000 (for filing Single or for Married Filing Jointly [no
typo -- it does not double to $200,000]), you can convert traditional
IRA monies to a Roth IRA (the conversion itself does not count toward
the $100,000 limit). Full income tax applies, but there is no 10%
early withdrawal penalty. In any year where you are eligible to
convert, you can convert as much or as little as you want. People
filing Married Filing Separately are not allowed to do conversions.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

You have to take into consideration about the tax rates. Current tax
rates are historically low and may move up in the future. You should
also question whether you want to be paying taxes in your working years
when right now its at low tax rates rather then deferring it till your
retirement years when you dont know what the the tax rates are and you
are not working.

Nathan Liskov wrote:
- quote -

Does choosing a traditional IRA give you some optionality? Can you
convert to a Roth IRA in a year where your income (and thus tax
bracket) is low, for example when you are unemployed or going back to
school?

I know very little about IRA rules, the implied statements in the above
questions could be wrong.

Rich Carreiro wrote:

- quote -

Not exactly, your options are $4000 in a traditional IRA or $4000 in a
Roth IRA + $1000 in up front taxes. So the traditional IRA is:

Traditional = P(1+r)^N (1-Tout) where P=$4000 (as stated by the OP)

But with the Roth, you pay an extra $1000 in taxes that doesn't get to
grow with the rest of your money, so we'll subtract the tax and its
potential growth off the ending account value:

Roth = P(1+r)^N - P(Tin)(1+r)^N

This reduces to the OP's equation:

Roth = P(1-Tin)(1+r)^N

Of course, you could argue that the $1000 in taxes could not have grown
at the same after-tax rate as the funds invested in the Roth (because
they would be taxed). Then the Roth would have a slight advantage over
the traditional IRA when Tout=Tin as long as you're investing more than
$4000(1-Tin) in the traditional IRA.

-Will

Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

No, I'm saying it because the original poster said, in essence,
"you could put P into a traditional IRA or you could put P(1 - tax rate)
into a Roth IRA."

That immediately breaks down for anyone who can afford to make a $4000
contribution whether or not they get a tax deduction for it. Because
that person's choice is between making a $4000 contribution to a
traditional IRA or a $4000 contribution to a Roth IRA and *not*
between making a $4000 contribution to a traditional IRA or a $3000
contribution to a Roth IRA.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Rich Carreiro wrote:

- quote -

Are you saying this because of the AGI phase-out of the deductibility of
traditional IRA contributions? Even so, the argument still applies to
401(k) vs. Roth contributions.

Richard Cline wrote:
- quote -


EXCELLENT comment. I am "in retirement", and my LARGEST cost
of living is the Income Tax that I must pay on my TRADITIONAL IRA.
There was no ROTH for me.
Cal Lester CLU

(btw, I am NOT complaining ! ! ! ! !)

"Nathan Liskov" <nate[at]lcs.mit.edu> writes:

- quote -

That formula is already wrong for the (I suspect significant majority
of) people who have enough cash lying around that they can make the
full $4000 contribution whether or not they get a current year tax
deduction for it.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

In article <SHh2MDlfCd4M-pn2-n0yNwzGlX8qO[at]localhost> ,
"Nathan Liskov" <nate[at]lcs.mit.edu> wrote:

- quote -

Keep in mind that it may not be so sismple. You do not know your tax
rate for the time you will be withdrawing the money. There is a good
chance that your home will be paid off so there will be no mortgage
deduction. Youir children will be independent so there wll be fewer
exemptions. A lifelong contribution to an IRA has a good chance of
becoming a large investment with a large required minimum withdrawal.

Dick


- quote -

I was asked whether it is better to contribute tax-deferred money to a
Traditional IRA vs after-tax money to a Roth IRA.

The answer is remarkably simple (ignoring early withdrawal or other
issues):

Do Traditional IRA if your tax rate is lower when you take the money
out.
Do Roth IRA if you expect your tax rate to be higher when you take the
money out

I did a spread sheet, but the formulas are easy.

Suppose you put in pre-tax P dollars this year into a traditional IRA,
or you put in aftertax P(1-Tin) dollars into a Roth IRA, where Tin is
your current tax rate.

You let the money grow at rate r for N years and then you take it out
when your tax rate is Tout.

The amount of money you have for either approach is

Traditional = P(1+r)^N (1-Tout)

Roth = P(1-Tin)(1+r)^N

The ratio is

Traditional/Roth = (1-Tout)/(1-Tin)

which is greater than 1 when Tout is less than Tin and less than 1
when Tin is less than Tout.

The result is independent of P and N and also would be true if the
rate of earnings varied every year.
Inflation is not an issue in this calculation.

For example, suppose your tax rate is now 25% and you expect it to be
20% when you start drawing from your IRA. Then

Traditional/Roth = (1-0.2)/(1-.025) = 0.8/0.75 = 1.06666

and you are 6.7 percent better off with the traditional IRA.

Nathan Liskov

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