Re: another where-to-put-my-money question

Sandra Loosemore <> writes:

> OK, suppose I have some extra money on my hands. My mortgage is paid
> off and I'm contributing enough to my 401(k) to get the full employer
> match. At this point, people like to recommend that you max out a
> Roth IRA before you do anything else.... but would it make more sense
> to use the money to pay the taxes on a Roth conversion on an existing
> traditional IRA instead? Is doing a Roth conversion such a winning
> idea that I should also roll over my 401(k) plans from previous
> employers into an IRA and convert them as well, and pull money out of
> my existing taxable investment account to pay the taxes? Or is it

If you assume tax rates do not change, and that the rates
of return on your investments are the same along the way,
the end result from a Roth is identical to that of a regular
IRA for a given amount of available (pre-tax) capital.

What a Roth does is allow you to protect more pre-tax
capital. If your tax rate is 20% and you put $10k into
a Roth, it's the same as if you'd put $12.5k into a
traditional IRA.

> the home equity and my emergency fund, right now I have about 15% of
> my investments in the traditional IRA, 25% in the 401(k) plans, and
> 60% in my taxable investment account.

Frankly, I'd max out the 401k *and* make a contribution to
a Roth (if you're eligible). I probably wouldn't worry
about making the conversion right now unless you happen
to be in a particularly low tax bracket this year (ie.
due to being out of a job or something).

> If it makes a difference, I'm 46, and this may be the last year my
> income is low enough to qualify to do a conversion for a while.

I wouldn't worry about it. And if your income is on the
upswing, simply max out all of your available tax-preferred
accounts (Roth, 401k, etc).

>From your numbers posted (60% taxable, 15% IRA, 25% 401k),
it looks like you have enough money to pay the taxes on
the conversion of the IRA *and* make a Roth contribution
as well. The more of your money you can convert from the
taxable accounts into IRA accounts, the better. It'd help
a little to know what kinds of numbers we're talking about
here, though - if you've got a million bucks tied up in
these accounts, it's a different story than if you've got
$100k tied up in them. At a glance, though, unless you
need all of that 60% easily accessible, use a bit of it
(it'd be no more than 3 or 4%) to pay the taxes on the
conversion of the IRA to a Roth. Then, assuming that
adding another $4k won't take a huge bite out of that 60%,
toss that $4k into the Roth, too.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! --
Are you posting responses that are easy for others to follow?