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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75540  
Subject: Re: IRA RMDs and Roth conversions Date: 12/20/2010 8:08 PM
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Assuming your figures are correct, you're paying 20% in taxes ($40k/$200k) which tells me you're in the 15% marginal tax bracket and the conversion is bumping you into the 25% tax bracket. More specifically, I'm figuring that an additional $32.5k of income would be taxed at 15% based you the info you've provided.

Putting the numbers you've provided in a spreadsheet (6% return, $305k IRA value, etc) and assuming your tax situation doesn't change, your RMDs would never exceed $32.5k and your tax on the distribution would never exceed 15%. In other words, by converting your IRA to a Roth, I estimate you're paying 10% more in tax on half of the money you're converting.

You also state that you "wish they had Roths back then", but you don't mention the tax you would have owed on that $38k. Assuming you took 25% tax out of that $38k of investment, you'd have only $229k. As mentioned, you could have taken/can take distributions out of the IRA and pay 15% tax, the taxed value would be $259k today or $30k more than investing in a Roth back in the day.

This is a long winded way of saying you've fallen into the trap of thinking that Roths save you from paying taxes. If my assumptions are correct, you'll end up paying MORE in tax with the conversion, not less.

IMHO, the goal shouldn't be to pay no taxes in retirement, but to manage taxes over your lifetime to pay the lowest rate on your retirement savings. I've posted in the past how investing in a Roth can hurt this goal if you care to search this board.

OTOH, my assumptions may be incorrect, tax laws will change, etc. Your conversion may be a great move, but some of the statements you make lead me to believe that you don't fully understand the tax consequences of Roths.

-murray
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