Tax on Roth Conversion problem

[Guest Yan]

I made roth conversion last year. I decided to pay taxes over 4 years. Now I found that the converted roth portion of money pushed our tax return bracket from 28% to 31%. This means I have to pay 31% tax for my roth conversion. This can mean thousands of dollars more to Uncle Sam over 4 years. I just cannot believe it. If I have left it in the traditional IRA, I think I will never have to pay such a high tax rate. Does anyone face the similar situation, or have I done something wrong in my calcualtion? Without the roth conversion, my husband and I are in the 28% tax bracket. I will greatly appreciate it if someone can help me and give me some guidance.

Yan

[John G]

Yes, you can face a change in tax rates. However, after playing with various spreadsheets and Roth calculators, I have concluded that the length of time you keep your investment sheltered is the primary driving factor for anyone under the age of 50 who converts. The second most important factor is "how" you invest, especially if you weight towards stocks. These two factors tend to dwarf differences in tax rates.

My experience has been that families are not very good at predicting their long term tax rates because too many circumstances change. Promotions, inheritances, investment success, change in federal policy, and change in deductions can change your tax circumstances.

I suggest that you plug your numbers into a couple of Roth conversion calculators to see the results. I have run some scenarios for friends in their mid 40s where they were much better off even with a double tax rate jump. Remember, the Roth also has some very attractive estate planning options and no forced payouts during your lifetime.

Finally, you also have another option, to return part of your 1998 Roth conversion back to regular IRA status if you are more comfortable at the 28% rate. I only offer these comments so that you crunch the numbers before you assume that you are worse off. Good luck.

[Guest ralinssv]

The tax-free benefits of a ROTH should far exceed the modest 3% marginal tax increase from 28% to 31% if you are young enough. As another writer suggested, have your numbers run through a ROTH calculator. What is surprising is that you weren't aware of the tax impact before you elected the conversion. In the future, it pays to do your homework before taking action; it can cost to do your homework after you take action.

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