Quote:
Originally Posted by gnuyork
How about in principle, just starting from scratch?
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I think starting from scratch - Roth is the way to go assuming you can invest the same amount. My last job didn't have a Roth 401K option, so when I left, I had about 10 years of 401K which I rolled into a Traditional IRA. At my new job I use the Roth 401K. I am 37, my plan is to take my Traditional IRA to my Roth IRA over the next few years while the US Tax Law has lower rates and have about 50/50 between the 2 IRA's its 80/20 right now. Depending on how the market goes - I may even push to have the Roth in the 80% pile - but that all depends on my ability to pay the taxes each year. I know I will pay 10-12K in taxes on each roll over - but the gains over the next 20 years should quickly pay for that loss. The answer would be different if I was 50.
If you can't invest the same amount - running the numbers makes sense. I dont know if taxes will go up or down - I do all my math assuming the same tax rate as today - an example I am running right now is below:
- Target Rollover Amount: $100,000
- Tax Rate: 24%
- Projected Tax Bill: $24,000
- Age 37
- Assuming 5% Gains for 20 years: $100,000 -> $265,000 (rounded the figure)
- Tradition Tax Bill in 20 Years: $265,000 * .24 -> $63,600
- Projected Tax Saved: $39,600
Yes, all of these assumptions can change, if the tax rate was 12% in 20 years I would likely break even, but if its 32% - I would save more - this is why I do my math at the same rate - I know 5% is also conservative - so that will impact it as well.
Overall - in addition to the tax hedge - I like the laws around how the taxes on Roth IRA work for when I leave it for my family - they also wont get hit with a tax bill. I have every intention of draining my traditional IRA first - so my major growth is tax free.