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Roth IRA Conversion

I don't know what percent of people the conversion favors. I do know it's worth discussing as it can have a huge impact for those who do benefit. Here are two examples from my personal experience:

80 year old woman, taxable income (I just did a projection for her) for 2006 - $27K. This includes an RMD (Required minimum distribution) from her IRA of $7950. Given how quickly the RMD rises - remember, her accounts are still growing, and the RMD divisor, dropping - it would rise past $11K by the time she's 84, and $15K by 90. By converting $4,000 this year, and just enough to stay in the 15% bracket, I project that by 90 we can have as much as $90K converted at 15%. Since the next rate is 25%, it's worth the effort. As an important side note, her two adult children are both 28% earners. When she goes to the Divine Treasury and leaves the IRA to the kids, their withdrawals from the Roth will not be taxed. And while she lives, if she has an urgent need for extra money, the Roth is her secondary emergency fund.

49 year old woman, on disability, worker's comp. Living on the disability payments and post tax savings. We convert enough IRA to Roth to keep her in the zero bracket, i.e. just the STD deduction/Exemption numbers, in 2007, $8750 (up $300 total from '06). By the time she's burned her post tax money, she'll be 70 or older, and her RMD will likely not push her above the zero bracket. Her surviving cat will not have any tax to pay on the Roth withdrawal, and the IRA is set to go to a charity.

These are two very different circumstances, of course. Illustrating that the conversion has specific times that it's called for. In both cases the savings are not insignificant. I'll close by saying that if the delta for the first case was just a jump from 25% to 28%, I might not be quite as enthusiastic about the conversion. The 10% delta (from 15 to 25) got my attention. The second woman also saves 10%, money she can ill afford to waste.


See Fairmark.com for an excellent guide to understand the bracket you fall into, and to see if this strategy will benefit you.