As I understand it, you can use non-retirement income to convert the balance in your non-Roth (pre-tax contributions) into a Roth balance (after-tax contributions). I’ve ended up with a non-Roth IRA from rollign over my 401k after I left to go back to school.
There are several factors. For one, I’m currently in a lower tax rate than I expect to be soon or at retirement. After the conversion I’d have to pay taxes on the entire balance I’d convert, but it wouldn’t be at too high a tax bracket. Second, I expect tax brackets are going up, so better to convert now while tax brackets are lower.
On the other hand, I’m not so sure that the government will really keep its mitts off my cash once I pay my taxes on it. If the government switches to a consumption tax (VAT style) or just decides to tax Roth IRA withdrawals directly than I’ll be taxed twice and this will be a loser. Also, conversions are tricky and I could mess it up.
Any thoughts?
A reader suggests:
Re: para. (3), I wouldn’t have any concern about the imposition of taxes on previously taxed income. any change will surely have a grandfather clause. This is a nil probability event to me. The consumption tax is more plausible, but still a long ways (politically) off. I wouldn’t plan with that uncertainty in mind; disregard it safely.
Another reader suggests:
Assuming a 3~4% growth rate in investment you should always make out with the Roth. If you investment return is not so good… like the past 15 years… then maybe its not.
Certainly, I would have made post tax (Roth style) contributions if I had the chance while working and I was at a higher tax rate then, which suggests that I should do it now that I have a lower one. However, I might not have invested as much. To make up some numbers, if you have 20 grand in a non-Roth IRA and you convert it paying $10k in taxes to end up with $20k in a Roth IRA then you’ve put 40 grand in pretax income (20k initial non-roth and 20k to earn the 10k to pay the taxes). So the after the tax paying contribution I might just end up with with putting too much of my wealth into retirement savings.
