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I have two IRA's (a traditional and a Roth). I am wondering if I should convert my traditional IRA to a Roth IRA this year. Currently have $16,000 in my traditional IRA and $4,000 at my Roth IRA. I am 25 years old and this year my income will be particularly low (about 6000).

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It all depends on what future you see for yourself. If you are a professional, likely to have a good pension when you retire and other assets, it is possible that you will wind up being taxed on your conventional IRA at the highest marginal tax rates. If that happens, you would probably be better off to convert while your tax rates are relatively low. But in other scenarios, it could be a toss-up.

If you paid the tax now, where would the $$ come from? Would you otherwise save those $$ and invest them? Or would you spend them?

Spreadsheet calculations are the best way to decide. You can use figures that apply specifically in your case.

Best of luck to you.
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Greetings, Bwlee, and welcome. You wrote:

<<I have two IRA's (a traditional and a Roth). I am wondering if I should
convert my traditional IRA to a Roth IRA this year. Currently have
$16,000 in my traditional IRA and $4,000 at my Roth IRA. I am 25 years
old and this year my income will be particularly low (about 6000).

I used the Motley Fool "Should I convert my traditional IRA to a Roth
IRA" calculator, and its analysis confused me.
It said I should convert everything in my traditional IRA to a Roth, BUT
in the future I should make contributions to my TRADITIONAL IRA NOT MY
ROTH IRA. This doesn't make any sense to me. Considering my age,
wouldn't I want to keep building my Roth IRA so that I could collect tax
free withdrawls which are likely to be much bigger than any taxes I
would pay on contributions?>>


The conversion issue depends on a lot of factors, not the least of which is your tax rate today versus that in retirement, how the taxes will be paid, how long the money can stay in the Roth, and the size of your potential estate. For details, see my analysis of this issue in the post appearing at http://boards.fool.com/Message.asp?id=1040013000441002&sort=postdate.

As to the conversion calculator, that's simply a link to one offered on line. It was not developed by TMF. I think, though, that the result has to do with your assumptions regarding the rate of return in your IRA choices and your assumptions regarding your tax rates today versus those in retirement. The calculator gives you some examples in the options section when you get down to the inputs for the future. Look at the examples provided, and you might get an idea of what's happening in your assumptions.

Regards..Pixy
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<<Spreadsheet calculations are the best way to decide.>>

Sorry, but spreadsheet calculations do not (and cannot!) take into account the political realities and the likelihood of the Federal government reneging on the deal, and taxing (either directly or indirectly) ROTH withdrawals 2 or 3 decades from now.

To me, it seems highly self-delusional to voluntarily pay taxes now in the fervent hope that doing so will let me avoid paying an equivalent tax 20-30 years from now. That's 10 or 15 Congress's and 5-10 presidents away.

Ray
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<<Spreadsheet calculations are the best way to decide.>>

Sorry, but spreadsheet calculations do not (and cannot!) take into account the political realities and the likelihood of the Federal government reneging on the deal, and taxing (either directly or indirectly) ROTH withdrawals 2 or 3 decades from now.

To me, it seems highly self-delusional to voluntarily pay taxes now in the fervent hope that doing so will let me avoid paying an equivalent tax 20-30 years from now. That's 10 or 15 Congress's and 5-10 presidents away.

Ray


Ray,

I have seen this viewpoint expressed many times on this board and others (I think by you). My question is do you really think that Congress will attempt to change the Roth rules so drastically? I can not imagine anyone being in favor of taxing the withdrawls, who would it benefit? I know the government would get more money, but it seems to me it would be so wildly unpopular that it would never pass two full votes and a veto.

Or am I just a wet-behind-the-ears 26 year old who doesn't know any better? 8-)


pikapp383
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<<<<I have seen this viewpoint expressed many times on this board and others (I think by you). My question is do you really think that Congress will attempt to change the Roth rules so drastically? I can not imagine anyone being in favor of taxing the withdrawls, who would it benefit? I know the government would get more money, but it seems to me it would be so wildly unpopular that it would never pass two full votes and a veto.

Or am I just a wet-behind-the-ears 26 year old who doesn't know any better? 8-)>>>>

Probably somewhere in between. When social security first passed, it was "sold" as only a small tax on a small portion of your income; now it is compromised of something like 5.4% up to approximately 72k for 1999 and 1.45% unlimited. IIRC, the number I have seen is that something well north of 75% of wage earners (like 85-90%) do not earn in excess of the cut-off.

Also, with the current income limits, many of the well-off and lobbyists who represent their interests will not have Roth IRAs because they were ineligible to open them [100k AGI limit for conversions, regardless of marital status {talk about a marriage penalty!}, phaseouts starting at 150k for married filing jointly and 95k (maybe 90k) for single filers]. If the income limits change, this concern may lessen. I still feel that eventually Roth IRAs will prove to tempting to the politicians seeking dollars, and will not be troubling (or less troubling) to those who do not have Roth IRAs and may well be jealous of those who do.

Having said all of that, if not eligible for a deductible regular IRA, then I think Roth IRA is a no brainer (assuming eligibility).

Just my $0.02. Regards, JAFO

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I am not sure what I am reading makes sense. Are there some out there that think that the gov. could, in the future, decide to renege on the whole Roth concept and say, "oh...we changed our minds.....yer gonna have to pay taxes on your Roth"??? I don't think so. Just my opinion, but I don't think they could legally DO that anyway. They made a deal in my mind...a contract with Americans so to speak. I don't believe that "contract" could be broken.

Now, they COULD decide to say..."ok....we're gonna lose millions in taxes in the future if we keep this Roth thing going, so we are canceling the idea altogether on any NEW accounts". Now THAT could definately happen.
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<< My question is do you really think that Congress will attempt to change the Roth rules so drastically? I can not imagine anyone being in favor of taxing the withdrawls, who would it benefit? I know the government would get more money, but it seems to me it would be so wildly unpopular that it would never pass two full votes and a veto.>>

Veto??? By who? A president who says that taxes should not be cut because the government needs all the money it can get?

"Who would get the benefit"? Are you kidding??? Take a look at DC, and count the Congressmen who delight at spending money. Guess where that money comes from.

<< Or am I just a wet-behind-the-ears 26 year old who doesn't know any better? >>

Yes. Sorry. But you'll grow out of it. ;-) Wait until you've lived through a couple of "temporary" tax increases that become permanent a couple of years later.

Try this URL. He mentions a number of similar occurances that have actually happened. FWIW, my folks (and plenty of other people) lost a lot of money in one of these.

http://www.ricedelman.com/planning/taxes/taxlaws.asp

Ray











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My question
is do you really think that Congress will attempt to change the Roth rules so drastically?


They won't change the Roth at all, they will simply use
withdrawals from it as a means test for something else.
(such as SS benefits - they already do it with earned
income, effectively taxing you twice on portions of
your past and current income !)
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