Converting a Deductible IRA to a Roth IRA
Should you convert an existing deductible IRA account to a Roth IRA?
This example shows the potential advantage of conversion.
We'll suppose that you have a deductible IRA worth $25,000.
We're assuming a 31% tax rate and 10% growth on investments.
|
Non-Conversion |
Conversion |
IRA Value |
$25,000 |
$25,000 |
Tax Due on Conversion |
$0 |
$7,750 |
IRA Value |
$25,000 |
$25,000 |
Non-Sheltered Account Contribution |
$7,750 |
$0 |
Note that you're paying taxes from additional funds outside the IRA;
and to keep the comparison fair, we had to add a matching amount to a non-sheltered account corresponding to the deductible IRA.
Now suppose 20 years pass, you're retired, and want to withdraw the entire balance from your accounts.
|
Account Balance |
|
|
IRA |
$168,187 |
$168,187 |
Non-Sheltered Account |
$29,435 |
$0 |
Tax Due on Withdrawal |
- $52,138 |
$0 |
Amount Left to Live On |
$145,484 |
$168,187 |
Once again, the advantage of the Roth IRA is that it lets you do the equivalent of putting more of your money into your tax-sheltered account - in this case, $7,750 more.
Conclusion
You can benefit from converting a traditional IRA to a Roth IRA
if you use funds from outside your existing IRA to pay the taxes due on conversion.
|