15 responses

  1. JoeTaxpayer
    March 11, 2012

    The key thing to understand here is that this discussion is for those who are above the limit to deduct the Traditional IRA deposit.

    For those choosing between deductible IRA and Roth, the discussion and analysis can get very lengthy. But in this case, the gain from the two-step is free money, and shouldn't be ignored. Great article.

  2. YFS
    March 1, 2012

    My crystal ball says my tax bracket will either be the same or higher, much much higher. I haven't run the numbers on splitting the contribution but because of the RMD it might not make since.

  3. UltimateSmartMoney
    March 1, 2012

    I would also consider splitting IRAs into Roth and traditional. It could be that your tax bracket may be lower when you are closer to retirement compared to now. You just never know what will happen in the future…

  4. Julie
    March 1, 2012

    Wow! This opportunity seems to be really nice, I haven't heard about Roth IRA before, but it must be really worth to pay the taxes now, because later, the fees and taxes could be higher. Thanks for sharing this informational article!

    • YFS
      March 1, 2012

      Wow, I thought everyone knew about the Roth IRA.. silly me lol

  5. retirebyforty
    February 29, 2012

    I think this is a bad plan. If you can't contribute to the Roth IRA, you're paying a pretty high tax rate already.

    For me, I'm pretty sure my tax rate will be lower when I'm in retirement so there is no point paying tax now when I can put it off until later.

    • YFS
      February 29, 2012

      Joe a lot of a factors come into play when talking about a roth conversion. For example, if you do not need the funds a Roth IRA is better than a Traditional IRA because with a Traditional IRA you have RMD at 70.5. Thus, forcing you to take your money and pay taxes regardless if you need it or not. Also, Roth IRA hedges against future tax increase where as a traditional IRA does not. With wage inflation it is possible that a persons tax rate could be higher in retirement. I know for me retirement will mean that I have passive income sources matching my lifetime active income thus my tax rate will probably be the same. Just because I'm not going into a 9-5 doesn't mean I won't earn a massive income. Alas, every situation is unique and that's why personal finance is thus personal :-)

  6. Kyle @ The Penny Hoa
    February 29, 2012

    Whoa! That's a huge difference.

    We try to max out our Roths each year, but so far I haven't had to deal with the income cap. Fingers crossed that'll be a problem soon! lol

    • YFS
      February 29, 2012

      You max out 401k's and Roth's each year? Ballin'!!!!!! :-) I agree having too much income is often a good problem to have but you lose a lot of deduction in the process. Don't get me started on the Alternative Minimum Tax!

      • Kyle @ The Penny Hoa
        February 29, 2012

        No – I wish! No 401K here – I haven't looked into my options there since becoming self-employed last year.

        LOL. I promise not to hijack your comment thread with a tax debate. :)

      • YFS
        February 29, 2012

        You have the best retirement options as a self employed person. Start your own 401k duh.. did you know you can the terms of your own employer match? That's huge! So you can invest 17k and have a 25% employer match.. now that's way more than your Roth can do :-)

      • Brian
        March 27, 2012

        You can also get a Roth Individual 401(k). One thing to watch out for with Individual 401(k) plans is high fees. SHOP AROUND! Some online brokers will be happy to open an account for you with no fees (neither ongoing nor "setup"); all you have to do is call your insurance broker for a bond that should cost around $100/year.

        If you own a business and are eligible for an Individual 401(k), this is a great way to still get the deduction when your income is above the limit for Traditional IRA deductions. (The downside is that it's complicated to figure out whether you should do a Roth 401(k) or deductible.)

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