SHOULD YOU CONVERT TO A ROTH IRA?
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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