To Roth or not to Roth?

February 9, 2009 12:06 PM

Should I convert my Traditional IRA to Roth IRA now or ever?

What are the criteria for moving from a Traditional IRA to a Roth IRA? Is it something people suggest? Given the market downturn it seems like it might be good timing to make such a move, but the feedback I have been given is mixed, so I humbly turn to the hive mind for answers.

For arguments sake say I have over $100k and I am 30 years away from retirement. I anticipate at least 6% return a year average but believe it will be higher given history and other factors.

posted by gnash to Work & Money (10 answers total)

I'm not much of an expert with this, but I think the key criteria are your current tax bracket and your expected tax bracket after retirement. Generally, you want to contribute to a Roth (or rollover) if you think your bracket is currently low and you'll have more income after retirement (or you think the tax rate will increase).
posted by Durin's Bane at 12:13 PM on February 9, 2009

The Roth is for after-tax investment - you wont' ever have to pay taxes on it again (simplifying, but...). Traditional is pre-tax, so you'll pay taxes when you pull out. Not really much sense pulling out of the trad. IRA - just make sure you max out the allowance for the ROth from here on out.
posted by notsnot at 12:34 PM on February 9, 2009

(IANYA, etc, etc) The advice I always received was that, if you're >10 years from retirement, the Roth IRA is the place to be. Traditional IRA taxes you as you take it out, Roth IRAs as you put it in--to me, retirement is when you want the MOST tax protection, due to limited income, so I'd rather take the hit now. I don't know how the current economic factors play into that, but I imagine if you have 30 years, it's better to be in Roth.
posted by ninjakins at 12:41 PM on February 9, 2009

See Andrew Tobias's nice recent discussion here. He includes a bad link to Vanguard's "Should I Convert My IRA to a Roth?" discussion and calculator; a good link (at the moment) is here.
posted by Dave 9 at 12:47 PM on February 9, 2009

I agree that the Roth is the better option. However, in doing research on this for myself, I have noticed that there are the following types of Roth IRA's: Savings, CD's, Mutual Funds and ETFs, Target Fund Dates, and Stocks. I have no idea which is the better option for you, but if you are financially able to do so, I would strongly recommending maxing out your Roth IRA investments for both 2008 as well as 2009 as I think there are only a couple more days to do so.
posted by lolalivia at 1:17 PM on February 9, 2009

I hedge mine with a balanced allocation. Using your historical barometer, taxes are at a historically low level and there are trillions of dollars of debt on the horizon. Nevertheless, prognosticating anything 30 years from now is foolish. As is, imo, expecting a conservative 6% annual return...
posted by stratastar at 2:05 PM on February 9, 2009

It is better to fund a new Roth with new funds, if you are eligible.

Conversion is a tradeoff. If you convert, you pay taxes now and don't in the future. If you stay, you pay none now but you do in the future. I did a calculation at one time and found that it is essentially a wash, everything else being equal.

So: make it not equal. Put the Roth into something that you think will grow significantly over the next three decades. Right now there are a lot of opportunities.
posted by yclipse at 2:38 PM on February 9, 2009

Lolalivia is wrong; you can contribute to a Roth for the previous tax year up until the filing deadline (April 15th). Take your time and make the right decision for you.

My personal take is that taxes overall are as low as they will be in my lifetime. But what you need to consider is what your effective tax rate is now, as compared to what it will be after you retire. This depends on how much income you have now, how much you'll have when you retire, as well as whether taxes go up or not. Additionally, the size of your traditional IRA may be smaller now, hence you will owe less taxes on it.

Here is an article from Motley Fool which discusses some of the related issues; it's from 2001 though so you will have to update the calculations for current conditions (e.g. I'm not sure if the AGI limit for conversion has changed or not).
posted by nat at 5:03 PM on February 9, 2009

Jumping a little late into this discussion, but I want to point you to an article that discusses some of the more complex strategies in detail: http://is.gd/jxs6

The take-away lesson - ask a CPA for assistance.
posted by megatherium at 12:00 PM on February 14, 2009

nat is correct. I had initially thought that Feb. 15 was the deadline instead of the correct April 15 date.
posted by lolalivia at 6:37 PM on April 9, 2009