Question

You have a balance in your Traditional IRA of $100,000 which you expect to grow to $140,000 in the next 10 years. You had your 60^th birthday last week. You are considering the possibility of doing a “Roth Conversion” by withdrawing the entire $100,000 balance from the Traditional IRA, paying state and federal income taxes combined of 29%, and depositing the remaining $71,000 into a Roth IRA.

1. What annual rate of return would you have to earn on your ROTH IRA investment in order for 71,000 to grow to $140,000 in exactly 10 years?

2. List all other significant factors you should consider in deciding whether to make the Roth conversion?

Answer 1

a).Annual rate of return = [(FV/PV)^(1/n)] -1 where FV (future value) = 140,000; PV (present value) = 71,000; n (number of years of investment) = 10

Annual rate of return = [(140,000/71,000)^(1/10)] -1 = 7.03%

b). Some factors which should be considered for deciding upon Roth conversion are:

1). Age of the investor (younger the person, more the growth in the Roth IRA)

2). Taxes (if the investor is paying a high tax rate then investing in Roth IRA will bring in tax savings as tax rate will be reduced or no tax would be paid on it provided certain conditions are met.)

3). Taxable income in the conversion year (the Roth conversion will increase taxable income in the year in which it is converted leading to a higher tax bracket and higher taxes.)

4). Timing of conversion (Converting to a Roth IRA early in retirement can reduce required minimum distributions.)

answered by: anonymous