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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: chic_hearne who wrote (83822)3/21/2001 11:33:37 PM
From: Don Lloyd  Read Replies (1) of 436258
 
chic -

...That said, I've contributed my $2K the last 4 years. I haven't put much thought into this so maybe my logic is wrong. It just seems the only difference is a bet on whether you will be paying more or less taxes when you retire.

There's more complication to it than that, but you're not wrong. The following are some points for which I have opinions.

1. A Roth IRA contribution seems preferable to a taxable account.

2. A Roth conversion should be done if and only if it is exposed to a low tax bracket rate. This could mean during a low income year, or during a year with available capital losses*, and it may imply that only a partial conversion is done to the extent that the lowest tax bracket is filled.

3. The biggest advantages of the Roth are in its distribution phase. The traditional IRA has the problems that increasing distributions face higher and higher tax rates and minimum distribution rules apply, as well as the fact that it is hard to keep it from being heavily and inflexibility taxed in an estate. The Roth faces none of these problems other than a straight estate tax. (AFAIK)

4. But the real reason for the Roth is that it can allow you to manage the distribution tax rate of a traditional IRA. The ideal situation is to have both a traditional IRA and a Roth IRA. With a sufficiently large Roth, you can limit your yearly traditional IRA withdrawals to one or more of the lower tax brackets and fill in your additional living expense requirements from the Roth tax free. Also, the combination of the two types of IRAs represents a type of diversification against unpredictable tax law changes which might affect one or the other type more or less.

Regards, Don

EDIT * - forget the capital losses as the conversion will be ordinary income and the $3K limit will still apply.
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