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Roth IRA

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I have a traditional IRA...
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: 9 years ago.Category: Tax
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Answered in 11 minutes by:
6/3/2008
Tax Professional: Merlo, Accountant replied 9 years ago
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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HelloCustomer

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
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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Customer reply replied 9 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.
Tax Professional: Merlo, Accountant replied 9 years ago
You are most welcome, and thanks again for the question.
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Merlo
Merlo
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Satisfied Customers: 9,783
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