No. of Recommendations: 0

You wrote- <I'm trying to figure out the logic behind making someone pay taxes on the converted amount that is income to the traditional IRA (as opposed to the
contributions made to it). Since income grows tax free in both a traditional IRA and a Roth IRA, why should one have to pay tax on this income during a conversion? This sounds like a penalty to me.>

Technically, income grows tax-*free* only in a Roth, Traditional IRAs grow tax-*deferred* until distributed. Unfortunately for all of us, the IRS considers a Roth conversion an authorized distribution, which of course, is a taxable event. (Whether you consider taxes a penalty is a philosophical issue, at the IRS a *penalty* would be 10% additional clams-Ouch)
Just think of the taxes as the soaking you get running from a good shelter (the traditional IRA) to a Great one (the Roth). You (& most folks), living in the 15% bracket now, will more than make up the loss in the LONG RUN (20-30+ years), assuming you pay the taxes from $$ outside your IRA (this last bit is *critical* too).
Remember, your goal is to Foolishly invest your way into a higher bracket by retirement time! You are 'locking in' your current 15% bracket on every Roth contribution. Neat trick.
Chris S.
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.