NCPA - National Center for Policy Analysis


June 15, 2010

As of 2010, individuals may convert traditional Individual Retirement Accounts (IRAs) to Roth accounts, which allows people to deposit after-tax dollars, but withdraw the accumulated balances tax free, says Pamela Villarreal, a senior policy analyst at the National Center for Policy Analysis (NCPA). 

Scholars from the NCPA used a financial planning model (ESPlanner) developed by Senior Fellow Laurence Kotlikoff to determine who would benefit from a Roth conversion, as measured by the amount of spendable income (after mortgage, taxes, insurance and savings) a household would have at retirement. Representative 40-year-old couples with different annual incomes ($50,000, $100,000 and $200,000) were modeled. 

At all three income levels, couples who convert their traditional IRAs to Roth IRAs this year expect to have a higher standard of living (more spendable income) if they retire at age 67.  Couples with moderate and moderately-high incomes have the most to gain from a Roth conversion: 

  • Couples with an annual household income of $50,000 will increase their standard of living 9 percent just from a Roth conversion, even if they continue contributing only to a traditional IRA.
  • If they convert to a Roth IRA and continue contributing to that account (instead of a traditional IRA), they will increase their standard of living 15 percent.  

For couples earning $100,000 a year: 

  • The Roth conversion will increase their standard of living 9 percent, even if they continue contributing only to a traditional IRA.
  • But with continued contributions to a Roth, their standard of living will increase 15 percent. 

For high-income earners (those with annual household incomes of $200,000 or more), converting their existing accounts to Roth IRAs increases their retirement 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. 

Source: Pamela Villarreal, "Should You Convert to a Roth IRA?" National Center for Policy Analysis, Brief Analysis No. 708, June 15, 2010. 

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