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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 79817  
Subject: Re: Roth vs. trad for 401k rollover? Date: 2/22/1998 9:55 AM
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Greetings, FoolOfShips, and welcome.

<<The great debate rages on. My husband anticipates receiving $40-50K from a 401k from a former employer, which he will roll over soon into a self-directed traditional IRA. We plan to invest Foolishly in stock market, of course, for maximum anticipated growth. We've been debating whether or not we come out ahead at retirement by 2 scenarios:
1) converting to a Roth IRA in 1998, paying taxes up front (over 4 years, 28% bracket) and withdrawing proceeds tax-free at retirement, or...
2) keeping trad IRA, have the money we would have paid in taxes and the magic of compounding work wonders, taking a mega tax hit at time of withdrawal. It's hard to anticipate what tax bracket we'd be in then and what our beloved lawmakers will do to the Roth IRA in the future. What approach, factors, formulas, crystal balls can we use to crunch the numbers as best we can with current assumptions?

Also, what portion of the money from the 401k would be taxed upon conversion from trad IRA to Roth IRA?>>

There just isn't an easy way to answer that question. You have to decide the future of taxes and where you'll fall into that picture. For some glimmers of what's involved, you may want to scroll back in this folder to 1/31/98 and read the thread under the subject "Roth Contributions and Conversions." That discussion may provide some food for thought as you struggle with this decision.

As to taxes, when you go from the traditional IRA to the Roth IRA this year, one-fourth of the amount rolled must be declared as income in 1998 and will be taxed at your ordinary rate. In each of the year 1999, 2000, and 2001 you must declare another one-fourth and pay taxes on those amounts based on your tax brackets in those years. As to how to pay those taxes, see the thread I referred you to earlier.

BTW, the best Roth IRA calculator I've seen can be downloaded for free at http://www.ey.com , the Ernst & Young website.

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