Stalling On Roth IRA Conversion Can Increase Cost

NCPA Expert Says Some Income Levels Benefit More than Others, But Higher Taxes Will Hit All If Delayed


Dallas, TX (June 15, 2010) - Due to the approaching expiration of the Bush tax cuts and expected increases in future tax rates, individuals who plan to convert to a Roth IRA should do so this year instead of waiting, according to a new Roth IRA report by the National Center for Policy Analysis.

"Converting to a Roth IRA can increase an individual's standard of living by 15 percent," said Pamela Villarreal, NCPA Senior Policy Analyst and co-author of the report, "but those who put off converting until next year or later will likely face the looming reality of higher taxes."

Roth IRAs, which were originally promoted by the NCPA and the U.S. Chamber of Commerce, grow tax-free and allow individuals to contribute at any age without being required to withdraw funds. Beginning this year there is no household income threshold for conversions. The threshold was $100,000 in the past.

Roth IRA conversion is ideal for those who can pay the taxes using money from nonretirement funds, those who expect their federal income tax rate to be much higher when they retire, or those who face little to no income tax burden today - so a conversion would cost very little to complete.

Using ESPlanner, a financial model developed by Boston University economist and NCPA Senior Fellow Laurence Kotlikoff, the report  compares representative 40-year-old couples  who have different annual incomes ($50,000, $100,000 and $200,000) but  similar circumstances (see table).

The report illustrates that at all three income levels, couples who convert their traditional IRAs to Roth IRAs this year expect to have a higher standard of living if they retire at age 67. If these couples convert to and contribute to a Roth IRA with no contributions to a traditional IRA, they will increase their standard of living by 15 percent.

  • Couples with an annual household income of $50,000 or $100,000 will increase their standard of living by 9 percent just from a Roth conversion, even if they continue contributing just to a traditional IRA.
  • For those who earn $200,000 or more, converting existing accounts to Roth IRAs increase their standard of living 7 percent; however, these earners exceed the allowable income threshold for making additional Roth contributions. Thus, they are limited to converting existing IRAs.

"The best vehicle for retirement savings depends on individual circumstances," Villarreal said. "For households who are still years away from retirement, Roth conversions protect a portion of retirement income against future tax increases.

To see the full report, log on to http://www.ncpa.org/pub/ba708. To arrange an interview with Pamela Villarreal, contact Leah Gipson via the information above.