... or at least the hype around the Roth. As you will soon learn, starting in 2010 anyone will be able to convert an IRA into a Roth IRA.
The brokerage firms see this as the opportunity of the year. As Fidelity excitingly promotes "With more than $1 trillion in IRAs ... advisers who get to their clients and prospects first ... will gain competitive advantage." The same thing is happening at all the big brokers ... the Roth is being actively promoted as a "no-brainer" for anyone with money to pay the tax now. Its highly likely that in the next few months some-one will try get you to convert your IRA to a Roth.
Simply put a Roth conversion allows you to pay all the tax on an IRA now and then withdraw the funds tax free in retirement.
The argument is that taxes will inevitably rise and so paying them now is just smart. While there are some cases where conversion makes sense, they are relatively rare among people with high current marginal tax rates.
The reason is that your high marginal rate - say 35% federal- is a function of you working and earning several hundred thousand dollars per year. In retirement you stop earning money - and your tax bracket plummets. 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.
It is possible that you are a good Roth conversion candidate but its not a "no-brainer". Before converting make sure your adviser gives a detailed projection of your taxes in retirement and compare the rates to what you are paying now.
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It's about time.
ReplyDeleteI've posted on this topic and feel like I'm the lone anti-Roth guy out there.
I'm not anti-Roth. I think it can be great for;
A) Those starting off in the 10% bracket or in an odd low income year.
B) Those who have post-tax IRA money, but little pretax, so can convert with little, if any, tax due.
C) Those taking RMDs with some room to "Top off" their current bracket.
I've read many dozens of posts on this, and your's is the first to talk about how few will land in even the 25% bracket at retirement. This wholesale conversion in '10 is not for the masses. Good post, Robert.
www.joetaxpayer.com
Joe