But he starts with "For the wealthiest, this is a bigger benefit than
most people suspect" and in his discussion "For someone who is going to
pay 35% tax on IRA withdrawals" which, in today's dollars, is income
over $373,650 in retirement. I think it's fair to say that fewer than
1/2% are in this position. But to be fair, MFJ who are now in the 33%
bracket may as well jump on his advice as if rates are going up, it will
be the 33/35%ers who are at risk.
MY biggest Roth Mania peeve are the 25%ers who stand a snowball's chance
of cracking out of 15% in retirement all jumping on this as if they have
so much at risk not converting.
Rich Carreiro writes:
The numbers are generally right.
The words are a bit screwy. "increase the tax benefit you get from
your retirement account by 54%" is just a badly written sentence.
What they mean, of course, is "increase the proportion of your assets
which are in tax-favored accounts substantially".
The options he describes as all having the same immediate
spendable value are (assuming flat 35% marginal tax rate)
A) $100,000 in a taxable account
B1) $35,000 taxable, $100,000 in a Traditional IRA
B2) $35,000 taxable, $65,000 in a Roth
C) $100,000 in a Roth.
Noting that it's always preferable to have a higher
proportion ofyour money in a tax favored account, any
way to get closer to C is good.
There's nothing particularly surprising about it.
And he (probably rightfully) ignores
C2) $153,846 in a traditional IRA
As he said, they're all equivalent if liquidated and
But if left alone, and, say, doubling over the course
of several years, C1 and C2 remain precisely equivalent,
while any scenario which leaves some of the money in a
taxable account subject to the ongoing tax friction along
the way to doubling -- likely comes out behind.
(ignoring a variety of things - suppose that the taxable
portion was in a fabulously tax-efficient investment and
was earning undistributed capital gains? Then the
along-the-way friction is minimal and the liquidation is
taxed at favorable cap-gains rates, just as one example)
So - yes - if you have taxable assets and a traditional
IRA, doing the conversion and paying taxes out of current
taxable assets is equivalent to having been able to put a
greater amount into a tax-protected account. But it's not
the Roth-ness which makes it magical (again, see C1 vs. C2)
It's really the same computation as noting that the Roth
effectively allows one to protect a higher pre-tax amount
of monay into an IRA. $5000 in a Roth (at 35% marginal
income taxes) is equivalent to $7692 in pre-tax money.
You can't put $7692 into a traditional IRA via normal
annual contributions - only $5000 pre-tax. To get to
the same level of immediate savings via a traditional
IRA, $5000 goes into the IRA and you pay taxes on the
remaining $2693 (leaving $1750) which you invest in a
taxable account. Of course the Roth is (likely) better -
and the higher your tax bracket, the higher the effectively
higher limit is. ($5000/(1-marginal tax rate))
Frankly, a much more compelling reason to consider the
Roth conversion may be estate taxes. The money used to
pay taxes on the conversion is out of the estate now.
Were it to remain in the estate and be taxed at the
absurd estate tax rates, then after the death, there's
that much less left to pay income taxes on withdrawal
from the IRA.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
Are you posting responses that are easy for others to follow?