Tad Borek <borekfm[at]pacbell.net> writes:

- quote -

Of course, if you do the conversion and pay taxes now, you
forfeit the future gains on all that money used to pay those
taxes. Assuming (and this is a *big* assumption) that tax
rates stay the same, and further, that the money used to pay
the current taxes was invested in a tax-efficient manner (ie.
in a tax-managed index-like fund or such), then the rollover
is basically a wash.

Of course, those are big assumptions. Further, the question
of where the money to pay the taxes comes from is a big one -
if you are selling taxable assets at a loss to come up with
the cash, you can use some of that loss against taxes due and
hopefully the rest against other cap-gains you took (which is
often a big surprise to fund holders - have their funds
decline a lot in a year and then to rub salt in the wound,
have to pay taxes on distributions).

And there are questions of whether those distributions
push you into a higher bracket (now or in the future).

It's far from an easy question to answer as to whether one
comes out ahead or not.

- quote -

One more consideration in favor of the Roth - if you have an
estate that's large enough that you are concerned about estate
taxes, then doing a conversion - effectively pre-paying the
income taxes to eventually be due on that IRA money - gets all
that money used to pay those taxes out of your estate without
diminishing the eventual spendable amount that passes to your
heirs. That could be a huge difference.



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JoeTaxpayer wrote:
- quote -

I am so far away from age 59.5 that I only think about the longer
term. Ballpark, and based in part on some awareness of what taxes have
been historically in the U.S., I am ready to bet the overall federal
tax rate for my modest income will be 30-50% higher at age 59.5 than
at present.

honda.lioness[at]gmail.com wrote:

- quote -

Agreed. What I am curious about is where along the curve do people feel
the rates will adjust. Are retirees with AGI < $35K going to see
increases, $50K? Or will it look more like one of the candidates charts
with the $150K-$250K seeing the hit? Of course, no one actually knows,
this is just discussion.
Joe

JoeTaxpayer wrote
- quote -

I have particularly in mind how so many believe that the government
will have to increase tax rates in the future. Thus when a person
retires, his/her income may very well fall, but tax rates could be a
lot higher, too.

I agree a Roth and/or conversion is not suited for everyone. The
decision continues to rest largely on a person's perception of future
parameters like tax rates.

honda.lioness[at]gmail.com wrote:
- quote -

The point I'd continue to repeat is that conversions all start at your
current marginal rate, agreed? Withdrawals usually have an opportunity
to start at some lower rate for most people.
At the very least we should have agreement that generalities are tough
on this topic, and the answer can be different for each individual.

Joe

I echo dumbstruck's very important points. Tad's points also deserve
consideration. Otherwise, as long as a person believes either that his/
her future tax rates will be higher or has other reasons to get a Roth
(like dodging the social security extra tax bullet), then yes, when
the market seems oddly low, it is a particularly good time to
convert.

I do think I have seen a fair amount of recommendatons like zxcvbob
suggests, though.

I concur with Bill Woessner's main points as well. Five years is the
time limit yada for getting one's money on conversion amounts without
penalty. The usual IRA emergency rules do not apply: five year wait or
pay the penalty, period.

Optimist wrote:
- quote -

The issue is more complex than the calculator addresses. It asks for
current tax bracket (by asking for current AGI) but then doesn't ask for
the rate at withdrawal. It states in the assumptions that "This income
value is used to compute the Federal income tax that is subtracted from
the traditional IRA’s distributions." This situation applies to so few
people, only those whose retirement income is about the same as when
working *prior* to any IRA withdrawals. i.e. they are going to retire
with income well above that while working. This might apply to the top
few percent (of people), no more.
Even with the prospect of rising taxes, do you feel that both the
standard deduction and exemptions (creating a zero bracket) and that
first 10% bracket goes away completely, the first dollar being taxed at
15% or more?

Joe
www.blog.joetaxpayer.com

Here's a calculator, one of the better that I've seen.
http://www.calctools.com/RothConversion.htm

Tad Borek wrote:
- quote -

If everyone thought like me, the world would be a strange place.

- quote -

Agreed, from the extreme case: Your $100K IRA with $50K basis is now
worth only $50K, conversion is free, a no-brainer.

- quote -

Maybe - this was what I was trying to address in the first reply. If
this is one's only income at retirement, you compare taking RMDs right
through the zero and ten percent rates and tell me how happy you'd be.

- quote -

We know it's not all-or-none. If the IRA has that little, I'd not
quibble, but odds are that it won't be taxed at the other end.

- quote -

I think we agree here, so long as the tax paid is out of pocket and not
from the IRA, and your 'convert during low tax year rule' is exactly the
stuff I preach. If only one could see a chart of their marginal rate
projected out from present time till death....

Joe (who mostly is in agreement with you)

JoeTaxpayer wrote:
- quote -

I thought you were going to say something along the lines of "it's not
relevant because if you are now willing to covert a $10k IRA to a Roth,
you should have been just as willing to covert $10k of your $20k IRA to
a Roth before it dropped unexpectedly in value" - which is arguably
true, though a lot of people don't think that way (including me probably!).

If you're one of the following people, then the current state of the
market may be very relevant to this decision...

1. if you have nondeductible contributions in your IRA, then the cost to
convert to a Roth drops when the market drops. Compare a $15k IRA with
$7k nonded contributions vs. the same IRA when the value is $8k.

2. you don't buy this "random walk" nonsense and your expectations for
future gains in the account are now substantially higher, and your
expectations for future losses are lower. So you see a low value as an
unusual opportunity to protect high future gains from taxes (the bigger
the gains, the more you'd prefer a Roth). This is really a variation on
the asset-location argument of "holding highest expected-return
investments in a Roth". It's especially true if the long-term numbers
are big enough that your eventual taxes (if you keep things in a regular
IRA) are going to clobber you...compare $3k MRDs to $50k MRDs.

3. you for whatever reason tend to think of a Roth conversion as an
all-or-none proposition, perhaps because you don't have all that much in
your IRA, and the dip in value makes it that much more attractive.

4. you feel that changing some or all of your IRA to "never taxed" from
"future taxed" is a constructive way to offset the dollar gains that
have happened, in effect boosting the value of your IRA despite the
recent investment losses, without having to contribute actual cash
(which you might be unable to do). I've actually used this argument for
doing conversions during non-working/between-jobs years..."you'll save
more for retirement this year by doing a low/no-cost Roth conversion,
than you have in the past five."

-Tad

On Dec 9, 7:03*am, JoeTaxpayer <JoeTaxpa...[at]comcast.net> wrote:
- quote -

Very astute, but a no-income retired person can't do your plan B so
may benefit by converting to a devalued Roth now. On the other hand,
might benefit more by waiting to year 2010 where I believe you can
average the conversion tax accross 2 years. Maybe best path for
retiree is the messy one of converting one third now and 2 thirds at
2010?

zxcvbob wrote:
- quote -

Because when you do the math, the state of the market is not so
relevant. Here's my thought, illustrated.

You have $10000 in the IRA, and convert to Roth, paying $2500 in tax
(out of other funds)
Decades later you have 10X your money, $100,000 in the Roth.

I have $10000, but take the extra $3333 (which is $2500, pretax) and add
it to my pretax IRA or 401(k).
Decades later, I have $133,333 which can be $100K after tax (if taxed at
25%)

The conversion has far less to do with the $10K having been $20K last
year, and more to do with:
A) current bracket
B) future bracket
C) estate concerns, including kid's brackets.

It's usually a good idea to use Roth conversions to "top off" your
current bracket, whether while working or in retirement, if you fearing
higher marginal rates later on. Multiple discussions I've joined on this
topic most often end up ignoring the relative value of the portfolio vs
recent past.

Joe
www.blog.joetaxpayer.com

On Dec 9, 9:34*am, zxcvbob <zxcv...[at]charter.net> wrote:
- quote -

I agree. I'd do it if I could. But I have to wait until 2010
(assuming the law removing the income limit on conversions is left in
place).

- quote -

Interesting question. The answer is... complicated (imagine that).
The simple answer is yes, but only after you've waited 5 years.
Fool.com has a whole page devoted to this very issue:

http://www.fool.com/Money/AllAboutIR...boutiras07.htm

I find the examples extremely illustrative.

--Bill

When the stock market is in the toilet, why don't we hear more
recommendations for converting traditional IRA's to Roths? It's the
perfect time for it because it minimizes your taxes.

Question: If you convert your traditional IRA into a Roth, is that
money then available for withdrawal (in an emergency, of course) w/o a
penalty?

Best regards,
Bob