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Subject:  Re: Roth IRA Contriubtions & Conversions Date:  2/5/1998  7:02 PM
Author:  TMFPixy Number:  1639 of 88052


<<If I want $5000 of income from a traditional IRA, I have to take out $5000 + $1400, if I'm in the 28% bracket, vs. $5000 from the Roth IRA. So, if you take into account the fact that withdrawals don't happen all at once, the traditional IRA starts to earn less as soon as withdrawals start.>>

Just to be picky, if you want to net $5K after federal income tax, then from an all-deductible IRA you need to take more than $1,400 for taxes. Taxes will be applied on the total withdrawal, so the $5K you want to net is only 72% of what you need. That means you must take about $6, 944 (all of which will be taxed at 28%) to get the $5K you want.

That doesn't mean the IRA is "earning less," though. It only means you have to take more from the traditional IRA to match the same withdrawal you can take from a Roth. IF you assume both earn the same return before and after you start taking withdrawals; IF you assume you will be in the same tax bracket before and after withdrawals; and IF you make the same tax-equivalent contributions to either IRA (i.e., $2K to the traditional and $1,440 to the Roth), then over the long run they are exactly equal and both will be depleted at the same time (ignoring niceties like possible death and mandatory required distributions from the traditional IRA starting at age 70 ½, a subject far too complicated to get into for this simple comparison).

OTOH, IF all of the above is the same EXCEPT you make a full $2K contribution to the Roth, then the Roth will win.


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