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URL:  http://boards.fool.com/also-if-we-were-to-have-an-awful-stock-year-30296513.aspx

Subject:  Re: Roth 401k vs. Traditional 401k Date:  10/2/2012  11:28 PM
Author:  MurrayS Number:  70999 of 75383

Also, if we were to have an awful stock year again and prices went way down, you could use that as an opportunity to move regular IRA into Roth IRA, pay taxes, and ride everything back up.

Ideas...


I don't think it's a bad idea, but I also think that people get too caught up in the <u>amount</u> of tax they pay vs. the <u>percentage</u> of tax they pay. If your tax rate in retirement is the same as when you make the conversion, the money in your pocket is the same.

For example, if you have $100 in a traditional IRA and convert it while you're in the 25% tax bracket, you will pay $25 in taxes leaving you with $75. Assuming your investment triples, you will have $225

OTOH, if you leave it in the traditional IRA and the investment triples, you will have $300. Pay your 25% tax at withdrawal and you're left with the same $225.

Now, if you don't have much income in retirement, it's highly likely that you will pay a lower average rate on the withdrawal. If, as I pointed out in my previous post, you could withdraw the money in the 15% bracket, you would only pay $45, clearly more than the $25 you paid to convert to a Roth, but you're left with $255 instead of $225.

Certainly, it's better to do the conversion at a lower stock price than a higher one since it's less likely to push you into a higher bracket, but, in the end, my advice is still the same: If you will pay more than 25% in taxes and you don't expect to have much income in retirement, leave it in the traditional IRA.

-murray
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