I find this example to be simple but interesting. Assume a tax rate of 30 percent, and an investment return of 10 percent. Convert $1,000 of your IRA to a Roth and pay $300 in tax. One year later, you will have $770 in the Roth. But, instead of converting, suppose you keep the $1,000 in the traditional IRA and withdraw it a year later. You will pay $330 in tax ($1,100 × 0.3) and you will have $770, the exact same amount as if you had converted it to a Roth.
Two points:
1. You are assuming that tax rates will be higher in the future, but they may not be.
2. If you ever need long term health care, assisted living, or a nursing home, you can use the traditional IRA money to pay for the care and take a huge medical tax deduction. In the case of a nursing home, 100 percent of the cost is tax deductible. With assisted living, you can deduct a percentage of the cost, which could be about 60 percent.
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