I'm in my 30's and trying to figure out whether I should convert some of my traditional IRA funds into a Roth. The funds would be taxed at 15% based on my current taxable income. So, I need to best determine if my taxable income at retirement will be at the 15% bracket or more. What are the possible sources of taxable income when you retire besides the withdrawals from your traditional IRA acct? Are your Social Security withdrawals included in taxable income? Thanks.


In regards to your question about Social Security being taxable income, yes - Social Security distributions are currently considered taxable income. That wasn't the case for decades, but what Congress giveth, Congress can taketh away.

According to IRS tax tip 2010-31 (http://www.irs.gov/newsroom/article/0,,id=179091,00.html):

Add one-half of the total Social Security benefits you receive to all your other income, including any tax exempt interest and other exclusions from income."

If that is higher than the following (2009) base amounts, some of your benefits may be taxable:

· $32,000 for married couples filing jointly. · $25,000 for single, separated, head of household, widow w/ dependent child · $0 for married filing separately

So if you're single, you'd have to keep your 401k + traditional IRA distributions + 1/2 social security distributions under $25k to avoid the social security adding to your taxable income

In 2010, the 15% tax bracket stops at $34k for single filers.

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The best argument I've heard about the "should I convert traditional to Roth?" is this: if you convert your traditional IRA to a Roth now - you pay your tax burden at your current marginal tax rate (or more if it bumps you into higher bracket). If you don't convert, you pay your tax burden at your average tax rate in retirement.

For most middle-class taxpayers with enough to convert that the decision matters, I think it's very unlikely their average tax rate will be higher than their current marginal rate, so in most cases - don't do it.

This is the article making that argument (in depth, with math!): http://www.joetaxpayer.com/images/ThinkingAboutaRoth401(k).pdf

The article's thesis is that popular financial press is wildly over-promoting the Roth, primarily through fault in the popular "side fund" analysis.

All that said - you actually have the ability to make the conversion now (by Dec 31st 2010), without paying any add'l taxes on it yet (1st payment not due until Apr 2012 for tax year 2011) and roll it back as long as you make the decision by Oct 15th 2011. I'll see if I can find the article laying out that logic.

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  • FWIW - I'm right in the middle of this struggle myself right now. After reading that article, I've decided against converting for retirement purposes, though I'm still toying with the idea in order to be able to withdraw my conversion contribution (penalty free) in 5 years to invest as the down payment on a house. – Jon S Dec 15 '10 at 6:04
  • glad you liked that article I discuss on my site. For those who wish to convert, I suggest 'filling up' the 15% bracket, but no more. – JTP - Apologise to Monica Jan 20 '12 at 4:43

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