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Author: SnootFool Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: Simple Investing/Retirement question Date: 4/12/2011 5:00 PM
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dhartman wrote: <<So, is there a reason that I A) wouldn't put something into the IRA every year even if I have already maxed out my 401K and B) Wouldn't convert what I have now and what I had every year from a traditional IRA to a Roth IRA? >>

As far as question A goes, I think your best option for new IRA contributions is a "backdoor Roth IRA." Watty56 already noted that the "backdoor Roth" option is open to you going forward. Here's another link that talks in detail about the "backdoor Roth:" http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-h...

Note that for this to work with the smallest tax bite, you need to clear any before-tax $$ from your IRA by transferring it to either your employer's 401K or a self-directed 401k of your own, leaving only after-tax $$ in the IRA. Then you can rollover w/o any taxes.

WRT question B, converting your Trad IRA to a Roth you state: <<* We are probably in the higher (if not highest) income bracket>> You need to consider your current vs future marginal tax rates, including state taxes,, before making a decision.
You're in the 35% bracket now but you don't mention any state income taxes. Worst case, a NY or CA resident might be facing an additional 8-10% tax on the Roth conversion income, for a haircut totaling 43-45% of what you converted. Ouch!
Compare that to converting to a Roth in retirement after you move to Florida or TX or another of the states w/o an income tax. The 28% bracket maxes out around $210K taxable income. Assuming you & the missus can scrape by (lol) on $150K of taxable income, that leaves about $60K of Roth conversion $$ that you can use to fill up the rest of the 28% bracket each year. Assuming you retire early at 55, that lets you convert ~$60K x 16 years = $960K before reaching the age for RMDs. Why would you pay 35-45% to convert now, when you can do it later for much, much less?
YMMV & future tax brackets are bound to change, obviously, so plug various scenarios into the mix.

Chris
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