A good argument for caution on Roth IRA conversions
Posted on 03 December 2009
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/a-good-argument-for-caution-on-roth-ira-conversions
Roth conversions are a hot topic headed into 2010 due to a change in federal law next year that lifts the household income limit for eligibility to convert traditional IRAs to Roth accounts. While converting can make sense, Charlie Farrell offers a sound set of reasons not to rush into a Roth conversion at CBS MoneyWatch.com.
“The basic analysis comes down to predicting future income tax rates,” writes Farrell, an investment adviser. “Essentially, if you think you’ll pay a lower income tax by converting today, as opposed to waiting and paying taxes in retirement, then you would convert.” But he goes on to list other important tax considerations, including your anticipated future tax bracket, distribution size and other taxes that come into play.
“The Roth IRA conversion requires multiple layers of tax and investment analysis,” he concludes. “Some people are using the conversion as a marketing tool, so take your time and make sure you pay for your own independent tax and financial analysis.” Via CBS MoneyWatch.com.
December 3rd, 2009 at 8:10 pm
Good post Mark, I couldn’t agree more with your statement “Some people are using the conversion as a marketing tool, so take your time and make sure you pay for your own independent tax and financial analysis.”
December 5th, 2009 at 12:40 pm
I’ve been writing about caution as well. Here is my take, with numbers as backup.
In 2010 a couple filing joint has two exemptions, $3650 ea, and a standard deduction, $11,400, total $18,700. This is money not taxed at all. $16,750 is taxed at 10%. Total $35,450. It would take $886,250 gross pretax money to sustain this withdrawal rate. The 15% bracket spans $51,250 and would take $1,281,250 to support (4% withdrawal rate.) Just under $2.2M in today’s dollars. How many people do you think are retiring today with $2.2M in retirement savings? It’s for this reason I think that RothMania is over blown.
To be clear – I understand the fear of rising rates. But my numbers address those who top out at 15%. Do you believe the tax on those in that bracket will also rise?
There are many situations where a Roth, either for deposits or conversions do make sense, there is no “one size fits all” and any post promoting Roth should make that distinction.
December 5th, 2009 at 12:46 pm
Joe: It’s worth noting that there are other reasons to consider Roths beyond tax calcluations. It can be a useful way to add flexibility to draw-down strategies, since no minimum distributions are required. Also can have estate-planning advantages. But, as I’ve indicated above, it’s not a one-size-fits-all situation at all.
December 5th, 2009 at 1:06 pm
For estate planning, I’d agree. My father died in the 15% bracket, the beneficiary IRA he left me now has RMDs and I am in a much higher tax bracket.
We’re in agreement. The topic really doesn’t lend itself to brief posts, most of which appear to be cheer-leading the news of Roth Conversion for all. With all the income/savings data out there, I’d be curious to know what percent of people would actually benefit from this? 10%? Fewer?
February 25th, 2010 at 10:48 am
Is it advantegous to a couple in their mid sixties with IRA’s in excess of $300k and income approx $200K to include other pensions, and SSN, but who plan to work well into their mid -70′s to convert some of the current IRA to Roth?
February 25th, 2010 at 10:50 am
Doug,
Take a look at this week’s column, “Is a Roth conversion right for you?”….
http://retirementrevised.com/money/is-a-roth-conversion-right-for-you