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D Stanley
D Stanley
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I would take the tax credit. If you expect to remain in the same tax bracket, then there is no benefit of converting to a Roth IRA, except to get around contribution limits.

If you convert $40k, you'll pay $8,800 in tax and have $40k in an IRA. If you instead invested that $8,800 in a Roth, you'll end up in the same place. Assume your tax rate both now and in retirement is T%, and the total gain between now and retirement in X%. You'll have (after tax) 40k * (1+X) * (1-T) in an IRA and 40k * T * (1+X) in a Roth. If you add those and combine terms, you end up with 40k * (1+X), which is the exact same you have if you converted all of the funds to a Roth.

The timing makes no difference either, since you'll selling "depressed" assets to buy "cheap" assets. You end up with the same thing either way.

Plus you'll pay more out of your savings for college, which lowers your net worth.

The most common reason it makes sense to convert to a Roth is if you are in an unusually low tax bracket )(the immediate tax hit is less) and expect your tax rate to be higher at retirement (you pay less at a higher rate at retirement).

I would take the tax credit. If you expect to remain in the same tax bracket, then there is no benefit of converting to a Roth IRA, except to get around contribution limits.

If you convert $40k, you'll pay $8,800 in tax and have $40k in an IRA. If you instead invested that $8,800 in a Roth, you'll end up in the same place. Assume your tax rate both now and in retirement is T%, and the total gain between now and retirement in X%. You'll have (after tax) 40k * (1+X) * (1-T) in an IRA and 40k * T * (1+X) in a Roth. If you add those and combine terms, you end up with 40k * (1+X), which is the exact same you have if you converted all of the funds to a Roth.

The timing makes no difference either, since you'll selling "depressed" assets to buy "cheap" assets. You end up with the same thing either way.

Plus you'll pay more out of your savings for college, which lowers your net worth.

The most common reason it makes sense to convert to a Roth is if you are in an unusually low tax bracket )the immediate tax hit is less) and expect your tax rate to be higher at retirement (you pay less at a higher rate at retirement).

I would take the tax credit. If you expect to remain in the same tax bracket, then there is no benefit of converting to a Roth IRA, except to get around contribution limits.

If you convert $40k, you'll pay $8,800 in tax and have $40k in an IRA. If you instead invested that $8,800 in a Roth, you'll end up in the same place. Assume your tax rate both now and in retirement is T%, and the total gain between now and retirement in X%. You'll have (after tax) 40k * (1+X) * (1-T) in an IRA and 40k * T * (1+X) in a Roth. If you add those and combine terms, you end up with 40k * (1+X), which is the exact same you have if you converted all of the funds to a Roth.

The timing makes no difference either, since you'll selling "depressed" assets to buy "cheap" assets. You end up with the same thing either way.

Plus you'll pay more out of your savings for college, which lowers your net worth.

The most common reason it makes sense to convert to a Roth is if you are in an unusually low tax bracket (the immediate tax hit is less) and expect your tax rate to be higher at retirement (you pay less at a higher rate at retirement).

Source Link
D Stanley
D Stanley
  • 141.7k
  • 20
  • 325
  • 391

I would take the tax credit. If you expect to remain in the same tax bracket, then there is no benefit of converting to a Roth IRA, except to get around contribution limits.

If you convert $40k, you'll pay $8,800 in tax and have $40k in an IRA. If you instead invested that $8,800 in a Roth, you'll end up in the same place. Assume your tax rate both now and in retirement is T%, and the total gain between now and retirement in X%. You'll have (after tax) 40k * (1+X) * (1-T) in an IRA and 40k * T * (1+X) in a Roth. If you add those and combine terms, you end up with 40k * (1+X), which is the exact same you have if you converted all of the funds to a Roth.

The timing makes no difference either, since you'll selling "depressed" assets to buy "cheap" assets. You end up with the same thing either way.

Plus you'll pay more out of your savings for college, which lowers your net worth.

The most common reason it makes sense to convert to a Roth is if you are in an unusually low tax bracket )the immediate tax hit is less) and expect your tax rate to be higher at retirement (you pay less at a higher rate at retirement).