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URL:  http://boards.fool.com/warning-this-ended-up-longer-than-i-thought--11029897.aspx

Subject:  Re: 401(k) to IRA rollover question Date:  7/9/1999  11:35 AM
Author:  PJGeorge Number:  11858 of 76397

Warning, this ended up longer than I thought. :-}

<<Secondly, it was suggested to me to later convert that transferred money to a Roth IRA. Is that
something that should be considered?

Always worth considering, but it's your decision. Some factors to consider:>>

I am considering this because I am changing jobs soon, too. I have about 73K in my 401(k) and I am 31 years old. I make 80K a year, w/ a wife, 2 kids and mortgage. That puts me in the 28% tax bracket.

So is this right?: If I roll my 401(k) into a traditional IRA, and then into a Roth IRA I pay taxes on the full 73K like it was income?? If so, that'll put me in the 33% tax bracket and I'll only have about 49K to put in my Roth IRA.

Now the question I have is: Will this be better in the long run since I can make widthdrawals from the Roth tax free when I retire? Or will the lost base principle outwiegh the future tax benefits? Okay, wait, I know how to use Excel....

Okay, this is what I did:

Traditional IRA
Principle: 73K
Rate: 11%
Duration: 25 Years (300 Months) - retire @ 56
Future Value: $1,127,695

vs.

Roth IRA
Principle: 49K
Rate: 11%
Duration: 25 Years (300 Months) - retire @ 56
Future Value: $756,946

Now, assuming I take equal widthdrawals for the next 30 years and pay 15% or 28% tax on the Traditional IRA and 0% tax on the Roth I get:

Traditional IRA: $31,951(15% Tax Bracket) or $27,064(28% Tax Bracket)
Roth IRA : $25,231

So it would seem to me that I answered my own question. It would be better to keep the traditional IRA and pay the taxes when I retire.


Now, If I wanted ALL the money in one lump sum at age 60 (IE: let it ride for another 4 years) I would have:

Traditional: $1,747,475
Roth : $1,172,962

And taking the whole thing would put me in the highest tax bracket for that year for the Traditional IRA. That's what? 40%? After the widthdrawal I would have:

Traditional : $1,048,485
Roth: $1,172,962

So now the Roth IRA looks more attractive.
I guess it all depends on the way you want to take it out, huh? I'm sure there are other considerations but the tax issue seems to be the biggest differentiator.

If my math is wrong, blame Bill Gates, I used Excel. :)

But does this make sense? Or am I totally off?
Paul.
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