Jan 24

I’ve been reading and writing about Roth IRAs for some time now, and it’s time for a Roth Roundup, from both fellow bloggers and the usual sources.

Amusing Juxtaposition
Creative Commons License photo credit: therefromhere

First, let’s start with How to Convert Traditional IRA to Roth, at 70½ a question posed at the Wall Street Journal. A fellow whose mom is turning 70½ in ’10 is asking how to “shield her mandatory withdrawals from future taxes on earnings.”  He has calculated the first RMD at $30,000, implying a gross pretax IRA of about $822,000. The reply, which floored me, was to convert it all this year to a Roth, and not worry about taxes again. Wow, send mom into the 35% for the next two years instead of converting over time? Sorry, I can’t imagine much worse advice. (And a comment there pointed this out)

Nickel wrote about Tax Diversification When Investing, a level-headed approach which straddles both the Traditional IRA and Roth to hedge one’s bet as to what their future situation will be. Mike at The Oblivious Investor wrote Tax Diversification: Roth IRA vs. Traditional IRA, a very similar post advocating a mix of account types.

Bad Money Advice asks Why are Roth IRAs so Confusing? Indeed. He shares my disdain for the bad advice out there advocating wholesale conversions with no qualification. In this article we’re shown the commutative property of multiplication, the fact that multiplying by .75 (to reflect a 25% tax rate) before deposit or after withdrawal leads to the same result. Another easy to understand way of looking at this issue.

JJ guest posted on Consumerism Commentary with 2010 Roth Conversion: Good Idea? A nice overview of the pros and cons of a conversion, covering a number of issues others may have overlooked: The non-deducted contributions, estate planning concerns, wholesale changes to the tax structure among them.

Robert Horowitz warns us to Beware the Roth IRA or at least the hype around it. While Robert doesn’t go into the dry boring math that I so enjoy sharing, he does offer a punchline similar to what I’ve been preaching, that “If you retire with no more than $5 million in investments including IRA’s – your federal marginal tax rate probably won’t be much more than 15%. Rates would need to go up dramatically before conversion makes sense.”

Next, we have Charlie Farrell’s Don’t Rush Into Roth IRA Conversions. Charlie also isn’t caught up in the Roth excitement, instead looking at the difference between a lump sum conversion today vs small taxable withdrawals later. His focus is that it’s tough to be confident that you’ll be in a higher tax bracket at retirement, and I agree with this position. Charlie is the author of Your Money Ratios which I reviewed here recently.

Robert Powell of MarketWatch wrote two pieces, Roth it right, Six mistakes to avoid when converting to a Roth IRA and Rethink that Roth 12 traps to avoid when converting to a Roth IRA. A lot of information here, worth reading very slowly. It’s not that a Roth is bad, just that it’s not the slam dunk some would claim it is. Many things to consider, and for many, jumping in to a Roth can be as costly as not Rothing for one who should.

Sam at Financial Samurai tells why you should Be A Sloth and Don’t ROTH – Why Converting To A ROTH Is A Mistake! It’s obvious from this post that Sam is a numbers guy as am I. He’s done the math and says that “To replicate $100,000 in income, you will have to have at least 25X your income in capital, or $2.5 million at a 4% risk free return to produce $100,000/year!” He also makes the point that one can potentially move to a state with no income tax at retirement, thereby saving 5-10% then instead of worrying about rates now. A good read and great series of comments by many including yours truly.

Last, in my role as staff writer at Jeff Rose’ Good Financial Cents, he’s published my Using a Roth IRA to Maximize Your Wealth and this past week, Unforeseen Consequences of the Roth IRA Conversion. Jeff has been pretty prolific on this topic as well, Roth IRA Rules For Minors. Your Kids Guide to Tax Free Money and Choosing Between Traditional Vs. Roth 401(k)s among his recent writing.

The message in all of these articles is that it’s not a ‘no-brainer.’ The decision to use a Roth, Roth 401(k) or the rules to convert are an individual decision, and there’s much to be considered. Do the math, take your time, and ask questions. Most of the articles cited here are from bloggers who are more than happy to keep the dialog going.

Joe

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4 Responses to “A Roth Roundup”

  1. Financial Samurai Says:

    Very nice round-up Joe! I’ve read half of these, and I have to say the discussions we had on my post, largely due to your very thorough commentary were the most interesting!

    I’m glad we don’t have to talk about the ROTH conversion anymore. :)

  2. JOE Says:

    We don’t? I was just getting started. Stay tuned.

  3. Daddy Paul Says:

    Good read.
    My rules for a Roth do it in a year when your income is down or the market is down. I did it in 2002 and in early March 2009. RYLPX has nearly doubled since the March conversion. Now it is my gain not uncle sams.

  4. V. F. Says:

    Ed Slott’s advice re the Medicare Premium as I call them “surcharges” as income crosses a threshold level of $85,000 for a single senior or $170,000 is right on the mark. Keep in mind the Senate-passed healthcare legislation (assumed to be part of Obama’s bill now) would FREEZE THE THRESHOLD LEVELS FROM 2010 through 2019. Take a look at what your income might have been 10 years ago and add that to what a senior might be withdrawing from IRAs etc. (converting to Roths) and you will find many more seniors caught in a trap of paying “Medicare Part B premium surcharges.” As Ed Slott indicates based on the income, the premiums or increases might be as much as $6000 per year.

    Then add to all of this the benefit of reducing the size of one’s estate (by converting to Roths) if one is unfortunate enough to live in NY where 16% of the income taxable or nontaxable after the first $1 million will hit estates and therefore beneficiaries of those estates — our sons and daughters.

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