Roth contribution vs. Roth conversion?

Submitted by Michael Frontera on Wed, 2023-04-26 13:05

If I hypothetically have $5000 to invest, is it more advantageous to make a Roth IRA contribution with those funds or pay taxes on a $29k Roth conversion (assuming 12% Fed 5% state)? Either way, I expect to be in a higher tax bracket at some point. It seems the conversion would generally make more sense.



Submitted by David Mertz on Wed, 2023-04-26 13:32

  • The conversion would generally make more sense.  Subsequent growth will be tax-fee instead of tax-deferred once your Roth IRAs are qualified.  However, if your Roth IRA contribution would qualify you for a Retirement Savings Contributions Credit, that could skew the calculus a bit, but if your tax rate is expected to be higher in the future, that would offset the benefit of this credit.
  • One thing to consider, though.  If you are under age 59½ and you need to treat the $5,000 as available for emergencies within the next 5 years, you might consider making the Roth IRA contribution instead.  Converted funds won’t be available without an early-distribution penalty until the 5-year holding period is met or you reach age 59½, whichever comes first, but once the holding period has been met or you reach age 59½, you’ll have access to the entire converted $29,000 penalty-free.

Add new comment

Log in or register to post comments