CONVERTING A TRADITIONAL IRA TO A ROTH IRA: BREAK-EVEN ANALYSIS.

Clayton, Ronnie J.; Davis, Lemuel W.; Fielding, William

Congress eliminated the income limit required for converting a traditional IRA to a Roth IRA in 2010. The conversion must be recognized as income for tax purposes in the year of conversion. However, a traditional IRA may be partially converted each year, spreading the conversion over two or more years and effectively distributing the tax burden over the conversion period and potentially allowing the converter to remain in a lower marginal income tax bracket. This may make conversion from a traditional IRA to a Roth IRA extremely attractive. This analysis considers conversions, develops a mathematical model to determine the time to break even (in years) when converting a traditional IRA to a Roth IRA, and provides a Monte Carlo Simulation of the model based upon historic financial market data for bonds and equities. The simulation provides information that may serve to guide investors as the conversion decision is made, yet the decision remains an individual one and may be influenced by factors other than the time to break even.

INDIVIDUAL retirement accounts; INCOME; TAX incidence; INCOME tax; MONTE Carlo method; FINANCIAL markets

Journal of Personal Finance, 2012, Vol 11, Issue 2, p10

1540-6717

Academic Journal