Converting a Traditional IRA into a ROTH (worth it?)

[Andy_B]

Hi all,

My wife will be stopping work sometime this year to become a full time mommy. As such, for the 2006 year we may be eligible for the ROTH IRA.

We intend to invest in the ROTH instead of our traditional IRA if we are eligible.

However, what I am not sure of is what to do with the Traditional IRA itself.

Should I convert it to a ROTH, pay the taxes now and let it grow tax free, or leave in the Traditional and let it grow tax deferred?

The IRA's have a good amount of money in them because they are made up of various 401k rollovers as well as the yearly investment we make in them.

Andy

[blech]

i think the answer depends on how old you both are and thus how long the money will be in before you start accessing it for retirement. there has to be a "calculator" or something on the website of one of the big mutual funds, but the longer it will be in, the more likely it is you want to make the switch to the Roth. my guess (based on nothing) is that the cutoff point is somewhere between 45 and 50.

[stopper4]

Does she plan to go back to work, later?

Fundamental question of which IRA is best also largely depends on whether or not you plan on being in a higher tax bracket when you retire than you are when you work.

If you do, then go Roth. If not, a traditional might be best.

I bet you'll be better off in a Roth............

[Andy_B]

Does she plan to go back to work, later?

No. Unless something dramatically changes, she is pretty much going to retire. We luckily don't need her salary to reach our goals.

All models we have built have used only my salary so her salary the last 6 years have been nothing but gravy.

But even if she does pick up a job in the future, it won't be even close to what she makes today, so we are simply discounting her bringing in any real money in the future.

Fundamental question of which IRA is best also largely depends on whether or not you plan on being in a higher tax bracket when you retire than you are when you work.

I am in the highest (or it is 2nd highest?) bracket now, and intend to be MUCH lower than that when I retire (assuming the brackets increase with inflation). Of course my tax braket will change once my wife stops working so I will need to reevaluate this once I have a full year of just me working.

Andy

[Andy_B]

i think the answer depends on how old you both are and thus how long the money will be in before you start accessing it for retirement. there has to be a "calculator" or something on the website of one of the big mutual funds, but the longer it will be in, the more likely it is you want to make the switch to the Roth. my guess (based on nothing) is that the cutoff point is somewhere between 45 and 50.

Thanks for the hint, I will poke around.

We are 37 and 38 years old respectively.

Andy

[Cascarino's Pizzeria]

Does she plan to go back to work, later?

Fundamental question of which IRA is best also largely depends on whether or not you plan on being in a higher tax bracket when you retire than you are when you work.

If you do, then go Roth. If not, a traditional might be best.

I bet you'll be better off in a Roth............

That's it in a nutshell.

And to get all y'all excited for 2006 - your 401(k) account will be able to hold both Roth salary deferrals and regular salary deferrals. It will definitely be a big change to the 401(k) market.

[Andy_B]

And to get all y'all excited for 2006 - your 401(k) account will be able to hold both Roth salary deferrals and regular salary deferrals. It will definitely be a big change to the 401(k) market.

I remember this being a part of the tax bill and it looked very interesting because it was not income limited if I understand it correctly.

My current company has not put out any information on this yet but I am hopeful that something with emerge in the late fall to explain the choices.

Andy

[Cascarino's Pizzeria]

I remember this being a part of the tax bill and it looked very interesting because it was not income limited if I understand it correctly.

My current company has not put out any information on this yet but I am hopeful that something with emerge in the late fall to explain the choices.

Andy

If your company opts to have Roth 401(k) contributions you will have a choice between your regular pre-tax salary deferrals, Roth contributions or a combination of both. You're right that there is no income limit so highly compensated employees may decide to go with Roth contributions. Again, whether it will be good for you or not depends on whether you think you'll be taxed at a lower or higher rate when you retire. Some say "yes, definitely income tax rates will be higher." Some think we may have a flat tax of 15% one day. In other words - nobody knows for sure.

And the most likely reason why you're company is keeping mum is because the implementation of the Roth 401(k) could be a cluster******** systems & payroll wise. So financial companies are rushing to get the kinks ironed out by 1/1/06.

[VFish]

... Again, whether it will be good for you or not depends on whether you think you'll be taxed at a lower or higher rate when you retire. Some say "yes, definitely income tax rates will be higher." Some think we may have a flat tax of 15% one day. In other words - nobody knows for sure.Admittedly I haven’t studied the ramifications, and I can understand how a National Sales tax might throw a monkey wrench into to best of plans, but why would a flat tax would change the equation for us common folk, especially those with a long term horizon?

[VFish]

Admittedly I haven’t studied the ramifications, and I can understand how a National Sales tax might throw a monkey wrench into to best of plans, but why would a flat tax would change the equation for us common folk, especially those with a long term horizon?I assume it's because Capital Gains aren't taxed under the "Flat Tax" so traditional IRA money will completely excape taxation.