Comments on: Roth Conversion Strategy For Those With Higher Incomes

By: Chuck Wienckowski

Chuck Wienckowski — Thu, 29 Apr 2010 13:20:57 +0000

Is there any reason a high income individual cannot make maximum non deductible IRA contributions every year ( 2010, 2011 and so on) and immediately convert to a Roth, thereby bypassing the AGI limitation?

By: Tim Keen

Tim Keen — Tue, 08 Sep 2009 16:46:14 +0000

I am thinking of converting some Traditional IRA money to a Roth in 2010. I understand the tax can be delayed until 2011 and 2012, but I can’t find the details. Can part of the tax bill be paid in 2010 and the rest in 2011 and 2012? Could I pay different amounts in the two or three years?

By: Gary

Gary — Wed, 26 Nov 2008 01:27:47 +0000

Has it been determined that a Roth conversion is more beneficial than keeping the assets in a tax-deferred retirement plan?

All things being equal (and they never are), there is absolutely no difference between paying tax now (as in a Roth) or in the future (QP/IRA). Try it; use any interest rate, any time period, and any tax rate. Will taking advantage of the Roth distribution rules be advantageous; is it needed? Will tax rates decrease or increase? Will the Roth taxation rules changes (like social security did)? Will Roth Legacy trusts be established?

By: Harry

Harry — Sun, 15 Oct 2006 08:49:28 +0000

This doesn’t work too well if you have substantial amount in a rollover IRA from previous 401k’s. You have to roll the rollover IRA into another 401k in 2009, convert your non-deductible IRA in 2010, and wait until you change jobs again after 2011 before you can liberate the money from your 401k again. Because most 401k’s have higher cost than what you can get in an IRA, your money can be trapped in the 401k for a long, long time you happen to like your job.

If you have a high income that doesn’t allow you to contribute to Roth IRA now, that means your tax bracket is already high. It’s hard to imagine that your tax bracket will be even higher than today when you retire.

By: Foobarista

Foobarista — Sun, 01 Oct 2006 08:21:30 +0000

An interesting strategy is if you have a big IRA from a rollover 401K, you’ll be able to Roth-ize it in 2010. If you are self-employed and have a SEP-IRA or self-employed 401K, you can do it and still keep your SEP-IRA or 401K – by closing one plan, rolling it over, and opening up a new one. It would be a fair bit of song&dance, but it could well be worth it.

As for the “being in a bigger tax bracket in retirement” argument, I’ve always been suspicious of it. A better argument is to use “Roth-ization” as a hedge against – likely – downstream tax increases, which could well put you into a higher tax rate on retirement, even if you aren’t rolling in the lap of luxury.

Of course, Congress could decide that Roths are too good to be true – or, more interestingly, could change the tax scheme from income-based taxation to consumption-based taxation, which would be the right thing to do but would hoze lots of people with income-tax-advantaged retirement vehicles.

By: » Two Giveaways, Two Gift Ideas, and some other Weekly Goodness! on Blueprint for Financial Prosperity

Sat, 30 Sep 2006 20:07:26 +0000

[...] JLP gives us a Roth conversion strategy for high earners. [...]

By: thc

thc — Sat, 30 Sep 2006 15:30:05 +0000

Samewriter: It’s doubtful that this “loophole” will change. It was built into the bill intentionally because it will create a tax windfall for the IRS in 2011 and 2012.

As for non-deductible IRAs and annuities, the advantage of delaying taxation can be huge depending on time horizon even if it does mean paying ordinary income tax rates vs. capital gains rates. Do the math.

By: Jeremie Beaudry

Jeremie Beaudry — Sat, 30 Sep 2006 03:26:56 +0000

There are many factors that you need to think about before you do the conversion. You need to make sure that there will be enough appreciation in your account for it to make any sense at all. So that is why JLP said mostly for younger people. 50 I would say would be okay depending on when you want to retire, what tax bracket you currently fit into, other types of retirement accounts you posses so you can let the Roth grow for as long as possible. This is also a great strategy for people that want to pass on their IRA to their heirs because there are no mandatory withdrawals with a Roth. You need to check with your tax consultant before you just get up and decide to switch over in 2010. Could be a big mistake.

By: samerwriter

samerwriter — Fri, 29 Sep 2006 20:02:37 +0000

I can’t think of any way that having non-deductible contributions in an IRA that cannot be rolled into another instrument is better than simply having that same money in a taxable account.

I’m not sure what the relevance of an annuity is. The same money invested in a stock fund outside of the traditional IRA will be taxed at capital gains and dividend tax rates. That money in a traditional IRA will be taxed at income tax rates. Capital gains and dividend rates for high income people (for whom this loophole is applicable) are usually substantially lower than income tax rates.

So, without the advantage of an up-front tax deferral, a traditional IRA contribution that cannot be rolled into a Roth is likely to be worse than putting that same money into a taxable account.

By: JLP

JLP — Fri, 29 Sep 2006 18:25:23 +0000

samerwriter,

It’s true that any “loophole” can be closed at any time. However, even if this were to be closed, the worst that someone would do is to have 4 years worth of contributions in a non-deductible traditional IRA. You will still get tax-deferred growth but you will pay taxes going in and coming out. You’ll still do better than you would in an annuity.