Roth Conversion from IRA
In today’s Webcast, Ed mentioned the often-heard “Convert to Roth Now” since both Taxes and Market Values are low. Good point, BUT:
1) At what point does the amount of funds lost to taxes now and their future growth potential more than outweigh the gain in tax-free distributions in the future?? Should this be calculated/estimated before absolute,y advising clients to convert IRAs now?
2) Since 2010 is a double benefit for converting to Roth, but taxes are assumed to go up, should we wait until 2010 or do it now? Why even bring up 2010 if it is not a probable benefit?
Thanks!
Permalink Submitted by Al Fry on Tue, 2008-10-07 21:47
If you can predict who will be elected President, then you’ll know which way taxes will go.
Permalink Submitted by Alan Spross on Tue, 2008-10-07 22:33
1) At the point where your tax rate for the conversion exceeds your average marginal tax rate in retirement distribution years. I believe Ed probably suggested converting after making an effort to determine the estimated relationship of those rates, rather than simply an unqualifed recommendation to convert in all cases. The comment about market values being low also only applies if equity investments will be maintained in the Roth conversion.
2) Given the above, there is no reason to wait until 2010 if you are eligible now. 2010 is unique to many who have been income ineligible for conversions for the last decade. If you are eligible, you can use your lower bracket and make incremental conversions each year. In the year 2010 only, the taxes are deferred half to 2011 and half to 2012, although the taxpayer can opt out of the deferral and pay the 2010 conversion tax in full. Someone who is converting small amounts each year gets to use the 2010 bracket that way, otherwise the 2010 bracket is not used due to the deferral. With the possiblity of changing tax rates in those years, many may convert but not make the decision about when taxes will be paid until filing time in 2011.