To Roth or Not to Roth
09/11/2010 2 comments
Whether converting from traditional IRA to Roth IRA, this is a question indeed. Barron's this Saturday's article mentioned a few points:
1). Roth IRA: it is after tax, so converting from traditional IRA means big tax bite (could be spread out in 2010 and 2011) up front. An example: for a middle aged, married-man filing a joint return, converting an $1 million dollar traditional IRA account to Roth IRA would mean 40% or $400,000 tax liability in two years. That leaves out $600,000 to begin with your Roth IRA investment. By our calculation, assuming you can achieve 10% annual return, it would take a little more than 5 years to get your account back to $1 million. Since 10% is a big question mark in the coming decade, be prepared for even longer.
2). However, once this tax bite is taken out, Roth IRA has two major advantages
- There is no requirement to take distribution from a Roth IRA, compared with at 701/2 age, you are required to take minimum distribution for a traditional IRA.
- There will be tax free for the earning.
So if you are currently 50 or so, you have 20 years to go to pay for tax, by then, we might or might not get through this dreadful decade. It has a chance to see a same or lower tax rate. So staying in traditional IRA might make sense.
But if you are currently 60 or older, you have this decade to go and the tax rate is heading higher for sure. Besides, if you believe that you are going to see lower or no return for your account, paying tax right now might make sense.
It does look like there is no clear cut answer, though your age, your current tax rate and future projection might make some difference.
labels:IRA,Investments,
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