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Author: RDALEY Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75531  
Subject: Re: Roth Conversion Date: 11/26/1998 3:41 PM
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TMFPixy@aol.com wrote:

> Subject: Re: Roth Conversion

Greetings, HubCapBurger, and welcome. There is no magic answer to your question. Conversions are tricky and depend on how you will pay the taxes due, what you think the tax rates for you will be in the future versus what they are now, how long the money can stay in the Roth IRA, your estate planning problems/desires, and a few other considerations. In general, if you pay the tax from money other resources (i.e., you don't keep some of the converted IRA for that purpose), if you stay in the same tax bracket in retirement, and you don't have to touch the funds for ten or more years, then conversion probably makes sense. See my analysis on this board at HREF="http://boards.fool.com/Registered/Message.asp?id=1040013000441002&sort=postdate for details. That missive will provide additional food for thought as you make this decision.

And yes, assuming you already pay state income taxes, then your state will want its cut of the income you must declare as a result of the conversion.

Regards….Pixy


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Thank you for your response. The reference was very helpful. I am still curious as to whether a higher rate of return than the 9% you use in your example would tend to make the Roth an even more advantageous decision. I don't have the formulas but my logic tells me that the greater the rate of return on investment, the larger the fund grows after conversion and before withdrawal and thus the greater the disparity between the front-loaded and the back-loaded net results. Is it possible to use what I assume to be spread sheet formulas in your Feb 98 example to run the comparisons at different rates of return than 9% - e.g. the apparent 11-12% the S&P has been returning or perhaps the more speculative but certainly well documented returns from the Fool Port.

The objective would be to be able to either make the comment "other things being equal, the higher the rate of return on investment, the more sense it makes to convert to a Roth IRA" or "other things being equal, the rate of return on investment doesn't make any difference between the Roth IRA and the Standard IRA."

P.S. Per your article and response, I will most certainly not use $ from the conversion to pay the taxes. It isn't logical to use this "special" money for taxes when it can be accumulating non-taxable interest. I MAY, however, reduce the amount I am putting into my 401K for four years to pay the taxes - or I will just take it out of hide. The best my 401K can do is the Contra fund - I would be interested in your views on this subject.

Regards,

HubCapBurger


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