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.
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.