Quote:
Originally Posted by Stu from NYC
There is an opportunity cost in paying taxes earlier than you have to.
For example if you paid 25% in taxes to convert to a roth that 25% is no longer earning you a return.
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That's not quite right.
Let's say you have $1000 in IRA. Earns 10% ($100). In one year that's now $1100. Withdraw it and pay 25% tax, you get $825.
Instead convert to roth and pay 25% tax today. You have $750 in the roth. Earns 10% ($75). In one year that's now $8250. Withdraw it and pay no tax, you get the exact same $825.
The variable is what tax rates are you encountering today vs the future. Will other income (social security) be taxed? And inheritance issues.
It's great to have tax free money in a roth in case you encounter a big expense that would otherwise require IRA assets withdrawn at a much higher tax bracket.