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Subject:  Re: Tax implication of roth conversion Date:  4/18/2010  9:10 AM
Author:  TwoCybers Number:  66963 of 95227

Johnathan I encourage people to be aware of tax issues, but do not let taxes determine what you do with regard to investments -- I am making the assumption you do not have net worth of millions and/or AGI in excess of $300K.

There is one very key issue about the Roth conversion deal that dominates the economics for most people. How long will the Roth IRA funds exist before they are withdrawn? Unless the funds are going sit for decades (like at least 20 years) before withdraw it is unlikely you will gain anything and you may be worse off.

Big obvious exception, people who will never need/use the Roth funds for retirement and want to use a Roth as an estate planning tool.

No one really knows what the tax or other situations will be like 10 years in the future. So get out your spread sheet and last year's 1040. Take the funds in your IRA, add them to your income, calculate State and Federal Income tax changes. Next assume some compound rate of return on the Roth Funds. That is the easy part. Take you Current IRA and apply the same compound growth rate.

If you never touch the IRA or Roth funds the comparison is easy. But if you want to pull funds out for retirement you will need to pick a year withdraws start and compare the two options.

Do not forget State and local taxes - in some locals they may apply.

Just to throw one other big unknowable into the mix - like it or not one of two things will have to happen in the next 10 to 15 years.

#1 The major federal spending area will seriously slow their rates of dollar growth. (Medicare, Medicade, Defense -- any of these will mean large number of people loosing their jobs because of the amount of cuts needed)

#2 Significant Tax increases - increasing the tax rates or adding new taxes such as a VAT.

My personal estimation in item #2 is a combination of a VAT plus a serious re-write of the current tax code. If things like the home mortgage deductiblity, farm price supports, oil depletion allowances, elimination of AMT, were removed/reduced in a tax code re-write, even guessing your tax status 20 years forward is folly.

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