Comments on: Should I Convert my Traditional IRA to a Roth IRA? http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/ Index Investing: The Oblivious Investor Sat, 13 Mar 2010 20:57:00 -0600 http://wordpress.org/?v=2.9.2 hourly 1 By: Mike http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3406 Mike Wed, 14 Oct 2009 20:03:12 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3406 "How many people will convert at 25%, only to find they retire in that zero bracket and paid the tax for nothing? For what, to avoid the risk of paying 28%?" Indeed. That's exactly what I fear is going to happen next year. I'm pretty convinced that most people can handle the basics of investing on their own. (Put together a portfolio of index funds, and hold them forever.) But when it comes to the tax aspects, I find that most people <i>really need help.</i> Looking forward to your post. :) “How many people will convert at 25%, only to find they retire in that zero bracket and paid the tax for nothing? For what, to avoid the risk of paying 28%?”

Indeed. That’s exactly what I fear is going to happen next year.

I’m pretty convinced that most people can handle the basics of investing on their own. (Put together a portfolio of index funds, and hold them forever.) But when it comes to the tax aspects, I find that most people really need help.

Looking forward to your post. :)

]]> By: JoeTaxpayer http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3404 JoeTaxpayer Wed, 14 Oct 2009 19:57:17 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3404 I've studied this and written multiple posts on my site as well as guesting on the conversion topic. One thing that I can't escape. The numbers. I find median net worth at retirement to be on the order of $250K. Call it $400K if you wish, to get to the 75% percentile. A chunk of that is surely one's home, $150K or so. So even at $250K in pretax retirement accounts, a 4% withdrawal rate is $10K/yr. My friend, this is the zero bracket. STD deduction and exemptions add to $18,700 for a married couple. $467K gross pretax money to withdraw the $18,700/yr, and stay in zero bracket. This analysis is the subject of an upcoming post of mine, but here's my twist; the conversion would likely benefit so few that the discussion of it is certainly overblown. How many people will convert at 25%, only to find they retire in that zero bracket and paid the tax for nothing? For what, to avoid the risk of paying 28%? I don't doubt rates are sure to rise, but do you believe that these lower brackets, the zero and 10% will both be done away with? I’ve studied this and written multiple posts on my site as well as guesting on the conversion topic.

One thing that I can’t escape. The numbers. I find median net worth at retirement to be on the order of $250K. Call it $400K if you wish, to get to the 75% percentile. A chunk of that is surely one’s home, $150K or so. So even at $250K in pretax retirement accounts, a 4% withdrawal rate is $10K/yr. My friend, this is the zero bracket. STD deduction and exemptions add to $18,700 for a married couple. $467K gross pretax money to withdraw the $18,700/yr, and stay in zero bracket.
This analysis is the subject of an upcoming post of mine, but here’s my twist; the conversion would likely benefit so few that the discussion of it is certainly overblown. How many people will convert at 25%, only to find they retire in that zero bracket and paid the tax for nothing? For what, to avoid the risk of paying 28%?
I don’t doubt rates are sure to rise, but do you believe that these lower brackets, the zero and 10% will both be done away with?

]]> By: Mike http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3197 Mike Wed, 23 Sep 2009 11:46:58 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3197 Evolution: Great point about partial conversions. Incidentally, I wrote a guest post for Moolanomy about tax diversification just yesterday: http://www.moolanomy.com/1991/tax-diversification-why-it-pays-to-tax-diversify/ Thanks for bringing it up in this context as well. :) Evolution: Great point about partial conversions.

Incidentally, I wrote a guest post for Moolanomy about tax diversification just yesterday: http://www.moolanomy.com/1991/tax-diversification-why-it-pays-to-tax-diversify/

Thanks for bringing it up in this context as well. :)

]]> By: Evolution of Wealth http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3196 Evolution of Wealth Wed, 23 Sep 2009 11:42:25 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3196 How about the concept of converting a portion of it? It's doesn't have to be all or nothing. By converting some of your traditional IRA you can better tax diversify in retirement. This might also help you be in a lower tax bracket from the standpoint of your traditional IRA and then you can supplement your income with tax-free money from your Roth. How about the concept of converting a portion of it? It’s doesn’t have to be all or nothing. By converting some of your traditional IRA you can better tax diversify in retirement. This might also help you be in a lower tax bracket from the standpoint of your traditional IRA and then you can supplement your income with tax-free money from your Roth.

]]> By: My Journey http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3193 My Journey Wed, 23 Sep 2009 00:42:06 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3193 Great Post! I think too many magazines and PF Bloggers assume the conversion is a must, rather than think it through whether it really appplies to everyone. Great Post! I think too many magazines and PF Bloggers assume the conversion is a must, rather than think it through whether it really appplies to everyone.

]]> By: Jeff Rose http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3191 Jeff Rose Tue, 22 Sep 2009 18:14:49 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3191 Good post and thanks for the link! I think of the stronger points made was cash on hand to pay for the tax on the conversion. If you are taking it out of the account, the conversion is almost pointless because it will most likely take you years to recoup it. Good post and thanks for the link! I think of the stronger points made was cash on hand to pay for the tax on the conversion. If you are taking it out of the account, the conversion is almost pointless because it will most likely take you years to recoup it.

]]> By: Kevin http://www.obliviousinvestor.com/should-i-convert-my-traditional-ira-to-a-roth-ira/comment-page-1/#comment-3189 Kevin Tue, 22 Sep 2009 14:22:55 +0000 http://www.obliviousinvestor.com/?p=5120#comment-3189 Keep in mind our tax tables are not set in stone. Another reason to consider converting to a Roth IRA is because you believe tax rates will increase. You may be in the same "bracket" in retirement i.e. same relative income, but end up paying a higher tax rate due to tax increases. Given the historically low tax rates we have today, the amount of current government spending and our nation's deficit, it's reasonable to assume some level of tax increases especially in the upper brackets. The strategy for some, then, would be to lock in their tax rate at these relative lows while enjoying some of the other benefits that come with a Roth IRA Keep in mind our tax tables are not set in stone.

Another reason to consider converting to a Roth IRA is because you believe tax rates will increase. You may be in the same “bracket” in retirement i.e. same relative income, but end up paying a higher tax rate due to tax increases.

Given the historically low tax rates we have today, the amount of current government spending and our nation’s deficit, it’s reasonable to assume some level of tax increases especially in the upper brackets.

The strategy for some, then, would be to lock in their tax rate at these relative lows while enjoying some of the other benefits that come with a Roth IRA

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