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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: IRA's, Keoghs, income limits, HELP! Date: 4/15/1998 1:45 PM
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Ray, thanks for the clarification and more kind words regarding my web site. I won't reproduce your analysis here but will comment on it. In brief it is a mathematical analysis seeming to show that conversion of a regular IRA to a Roth IRA results in equivalent after-tax results (a wash) if the taxpayer's marginal rate is the same in retirement as it is at the time of the conversion.

There is certainly plenty of room for reasonable minds to disagree concerning the likely benefits or detriments of a rollover to a Roth IRA. My feeling is that your analysis leaves out the two most powerful features of the Roth IRA. Not everyone can take advantage of these features, and for those who can't, your analysis may be right on the mark. But for those who can take advantage of these features the Roth IRA can be a huge winner.

One of these features is the ability to fund the Roth IRA with the same number of after-tax dollars as you would otherwise have in a regular IRA as pre-tax dollars. Your analysis implicitly assumes that the conversion tax is paid out of the IRA dollars. If the rollover tax is paid from non-IRA savings, the amount of tax-favored savings is increased, and in many cases increased dramatically. (See "The Roth IRA Is Bigger" on my web site for details.) This factor alone can produce a huge increase in the benefits of IRA savings that is not reflected in your numbers.

The other big factor is elimination of the required distribution at age 70-1/2. It's hard to project the benefit of this rule for someone who is many years away from retirement, but I've seen a projection in which the benefit of this rule is astonishing for someone who makes the rollover at retirement age, lives off of other assets, and passes the Roth IRA to children after living to life expectancy determined as of the time of the rollover.

The Roth IRA isn't for everyone. I try to provide a balanced discussion in my web site so readers can sort out the advertising hype from the sensible advice. Overall, though, I think there's good reason to be excited about the Roth IRA, and that most people who qualify to use it, and use it appropriately, will reap handsome rewards.

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Includes a complete guide to Roth IRAs
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