Convert
my IRA ?
The Taxpayer Relief Act of 1997 provides you with another important retirement decision:
Should I convert my current IRA? If you have already determined that you are eligible to convert your existing IRA into a Roth IRA, read on to
learn whether this is a good option for you.
This section outlines
key factors which influence the decision to convert and provides
some simple scenarios to help you
understand the financial implications.
Key factors that can influence the decision to convert to a
Roth IRA include:
- The length of time until your retirement
- Your current and future tax brackets
- The expected earnings on your IRA investments
- Your ability to pay the applicable taxes on the conversion
from outside income
Keep in mind an additional incentive to
convert your Standard IRA in 1998. As a one time bonus, the tax payment for people who
convert in 1998 will be spread over 4 years in equal installments. Therefore, you have an
extra 3 years to pay the tax obligations incurred by converting your Standard IRA.
Hopefully, this will provide a better chance that you can pay the taxes out of other
resources than the converted IRA itself. To better understand the conversion issue, let's
look at some case studies of different situations.
Conversion Case Studies
Assumptions:
This site makes similar assumptions in all
three case studies below. (Keep in mind that these scenarios deal only with the conversion
issue. The calculations do not assume any further contributions over the lifetime of the
account.)
Everyone meets the eligibility
requirements to convert to a Roth IRA.
All retirement investments will earn 8%
compounded annually over their working life, until retirement at age 65.
After age 65, the money will continue to
grow at 8% annually, and the retiree will withdraw the money in equal amounts each year.
We assume they will make withdrawals for 20 years until the age of 85.
The scenarios have been calculated
assuming the same tax rate during both working years and in retirement.
Finally, and most importantly, we assume
that the tax liability due at the time of conversion (or spread over 4 years if converted
in 1998), is paid from funds outside of the retirement account. If the money is withdrawn
from the IRA to pay this liability, the effects of compound
interest will be greatly lessened and it may not make sense to convert to a Roth IRA.
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