ROTH conversions

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).

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:

--Bill

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

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

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

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 k IRA with k nonded contributions vs. the same IRA when the value is k.
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 k MRDs to k 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

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

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

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.

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.

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)

Here's a calculator, one of the better that I've seen.

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

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.

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

JoeTaxpayer wrote

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.

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

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.

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.

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.