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Ask Merlo Your Own Question
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Roth IRA

Customer Question

I have a traditional IRA. I also have sizeable retirement plan accounts i.e. TSP, TIAA, Horace Mann. Two yrs from now I''ll need to begin taking distributions. My question is, how to decide if funneling retirement plan account funds into a Roth would lower the overall taxes I will have to pay. The dilemma is whether to pay taxes on distributions when they start or to pay taxes at the time of moving a sizeable sum into a Roth? How to figure out what would be most advantageous tax wise?
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.


The real key here is to determine what tax percentage you will be paying if you withdraw funds from your traditional IRA and convert them to the Roth IRA. If you are currently still employed and your end tax bracket is in the 25% , or even higher, than you will automatically pay at least that much on your rollover, plus whatever state taxes may apply. So if it ends up costing you 25% to 30% to convert the traditional IRA funds to a Roth IRA, then if you are only two years from retirement that would probably not be the best choice.

Just as an example - If you withdrew $100,000 from a traditional IRA and wanted to convert that to your Roth and if you were in the 25% federal tax bracket, now your net rollover becomes $75,000. If there are state taxes on top of that of say another 5%, now you are down to $70,000. So you put the $70,000 in your Roth, and you have to figure how long it will take you to get to the break even point on that exchange. Since you say you are only 2 years away from retirement, your investments are probably for the most part in what are classified as "safer" investments such as CD's and bonds, which are not yielding much at this point in time.

On the other hand if your income levels currently are low enough where you would only be paying 15% on those conversions, then it might be worth considering.

If this answer has been helpful, kindly press the "Accept" key. Positive feedback is also greatly appreciated. Thanks for the question.

Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Thank you very much. This gets me to the heart of the matter and will help me figure the advantage vs disadvantage of converting.
Expert:  Merlo replied 8 years ago.
You are most welcome, and thanks again for the question.