Convert my traditional IRA to a Roth? | TigerDroppings.com

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Fat Man
LSU Fan
Covington, Atlanta, Winston-Salem
Member since Jan 2006
6472 posts

Convert my traditional IRA to a Roth?



Broker wants me to switch over. Says advantages are I won't be forced to remove money at 70 and I won't be subject to ordinary income tax when distributed.

Roth: "Money grows tax-deferredd and is tax-free when distributed, as long as certain criteria are met." ... that 'certain criteria' bothers me; I'm asking for a clarification.

My current tax rate is low, so being taxed on the conversion of "pre-tax assets" should not be a problem.








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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
30530 posts

re: Convert my traditional IRA to a Roth?


quote:

Roth: "Money grows tax-deferredd and is tax-free when distributed, as long as certain criteria are met."


Pros: You can withdraw from the Roth anything you put into it whenever you want, no penalties, no taxes, no questions other than filling out a form. It's not much more involved than taking money from your checking account. That's the contribution part. Anything you earn above what you contribute is still subject to early withdrawal penalties and such, but is totally tax free. Not tax deferred.

What's the downside? Mostly the fact that when you do the conversion you will pay all the tax up front. The IRS is still getting paid, that's why they don't care if you withdraw it later.

Purely financially the Roth vs. traditional question is more or less a tossup. I like having a Roth simply because it means I don't have to consider it as "locked-up" money. Instead of diverting funds to a taxable savings account I just stuff as much as possible to a Roth. I can get it back with no fuss or penalty in an emergency, and in the meantime get tax-free returns. That beats a savings account any day.






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Fat Man
LSU Fan
Covington, Atlanta, Winston-Salem
Member since Jan 2006
6472 posts

re: Convert my traditional IRA to a Roth?


quote:

but is totally tax free. Not tax deferred.


nice.

quote:

the conversion you will pay all the tax up front.


this needs to be my calculation.

Thanks.






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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
30530 posts

re: Convert my traditional IRA to a Roth?


Like I said, for most people it's a tossup. But I like it since it is essentially an emergency fund with tax-free returns. With this setup you don't really need a separate emergency fund anymore, put those funds directly into the Roth instead.





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LSUtoOmaha
LSU Fan
Nashville
Member since Apr 2004
21279 posts

re: Convert my traditional IRA to a Roth?


quote:

With this setup you don't really need a separate emergency fund anymore, put those funds directly into the Roth instead.


This line of thinking depends on the person. For some people, having a retirement fund that muddles with their "emergency" fund is not the best idea.






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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
30530 posts

re: Convert my traditional IRA to a Roth?


quote:

For some people, having a retirement fund that muddles with their "emergency" fund is not the best idea.


I honestly don't get this. You don't withdraw from either unless you simply have to, and a tax-free account beats a taxable one.






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LSUtoOmaha
LSU Fan
Nashville
Member since Apr 2004
21279 posts

re: Convert my traditional IRA to a Roth?


I agree with you. However I think many less rational folks would end up dipping into their retirement account too often if there was not a barrier, such as a penalty.





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cdl2006
LSU Fan
Metairie
Member since Nov 2007
150 posts

re: Convert my traditional IRA to a Roth?


The distribution rules for a Roth conversion are slightly different than those of normal Roth contributions. With a conversion, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions. My guess is this is one of the criteria he had in mind. They have some further info on this here. LINK





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Fat Man
LSU Fan
Covington, Atlanta, Winston-Salem
Member since Jan 2006
6472 posts

re: Convert my traditional IRA to a Roth?


quote:

, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions.


got it. thanks.






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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
30530 posts

re: Convert my traditional IRA to a Roth?


quote:

With a conversion, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions.


Excellent point.






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