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.



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.

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Roth IRA Calculator
Comparing Calculators
Conclusions / FAQ

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