Best of the Week
Most Popular
1.North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - Nadeem_Walayat
2.Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - OilPrice_Com
3.Gold and Silver : The Battle for Control - Rambus_Chartology
4.Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - Nadeem_Walayat
5.Deep State Conspiracy or Chaos - James_Quinn
6.The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - Plunger
7.Gold Stocks Coiled Spring - Zeal_LLC
8.Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - John_Mauldin
9.Crude Oil Price Precious Metals Link in August - Nadia_Simmons
10.Gold and Silver Precious Metals Nearing Breakout - Jordan_Roy_Byrne
Last 7 days
Global Financial Crisis 10 Years On: Gold Rises 100% from $650 to $1,300 - 23rd Aug 17
GBP/USD Extends Losses - 23rd Aug 17
Donald Trump Terrorist in Chief, “We Aren’t Nation-Building Again, We Are Killing Terrorists” - 23rd Aug 17
How Planned Fed Rate Increases Impact The National Debt & Deficits - 23rd Aug 17
The 3 Assets to Add to Your Stocks Portfolio in This Rate Tightening Cycle - 23rd Aug 17
Half Price UK Theme Parks Entry 2017 With Cheap Chocolate Packs - 23rd Aug 17
[GIFT] Market Control System! - 23rd Aug 17
4 Reasons European Stocks Will Make a Big Comeback This Year - 22nd Aug 17
3 Lesser-Known Charts Revealing a Massive Stock Market Disconnect - 22nd Aug 17
U.S. Treasury Secretary: "I Assume Fort Knox Gold Is Still There" - 22nd Aug 17
Is the Stock Market Setting itself up for a Spectacular Crash? - 22nd Aug 17
Power Elites Launches Civil War Against Trump - 22nd Aug 17
The Stock Market No Longer Cares About Trump - 21st Aug 17
The Coming Boom Of Productivity Will Get Our Economy Back On Track - 21st Aug 17
Buffett Sees Stock Market Crash Coming? His Cash Speaks Louder Than Words - 21st Aug 17
This Could Be The Biggest Gold Discovery In History - 21st Aug 17
Stock Market Correction in Full Swing - 21st Aug 17
Seeking Confirmations – US Stock Market - 21st Aug 17
The changing demographic of online gamblers - 21st Aug 17
Gold is a coiled spring… the breakout is here, fundamentals are in place, technicals are compelling - 20th Aug 17
A Midsummer Night's Dream: Buy Gold and Silver - 20th Aug 17
Gold Mining Stocks 2017 Fundamentals - 20th Aug 17
EIA Weekly Report and Crude Oil - 19th Aug 17
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Why Switching to a Roth IRA May Be the Best Investment Decision You’ll Ever Make

Personal_Finance / Pensions & Retirement Aug 05, 2017 - 03:55 PM GMT

By: John_Mauldin

Personal_Finance

By Terry Coxon : Should you convert your traditional IRA or 401k to a Roth? Or are you better off sticking with what you already have?

Either way, you stay plugged into the same powerful, wealth-building advantage that makes an IRA such a good thing to have—continuous compounding of investment returns unhindered by the drag of taxes.


Inside an IRA, all your earnings, 100%, get reinvested every year, year after year, for a faster build-up of wealth.

It’s when you take money out that a Roth IRA treats you very differently than a traditional IRA.

Traditional IRA vs. Roth IRA

Except for any non-deductible contributions you might have made, withdrawals from a traditional IRA are taxable. So a large share of every withdrawal is lost to the tax collector.

Withdrawals from a Roth IRA, on the other hand, are tax-free, provided the plan is at least five years old and you wait until the year you reach age 59½.

Just pay attention to the calendar and every penny you get from a Roth is really yours.

Roth World is clearly a sweet place for your portfolio to live and grow. But getting it there can be expensive, which is why the Roth decision can be hard to make.

It’s a Big, Taxable Step… and Worth It

You are free to convert a traditional IRA to a Roth IRA at any time.

There are no age requirements (either for you or for the plan), and there are no income tests to meet. The conversion door is wide open. It’s a big financial step, though.

Those contributions you have deducted as well as accumulated investment returns would pop out as taxable income. This means converting any part of a traditional IRA to a Roth triggers an immediate tax bill.

Do it anyway. Unless you’re confident you are destined eventually for a much lower tax bracket, paying the tax bill for converting to a Roth now is almost certainly the right move… but only to the extent you are able to pay the bill out of assets you own directly.

Here’s the logic.

Let’s suppose, for the sake of simplicity, that you are in a 40% tax bracket (state and Federal) and that you always will be. Regardless of investment performance and regardless of how long you wait to make withdrawals, 40% of what comes out of your traditional IRA is already tagged as government property. What you get is the remaining 60%.

In other words, a traditional IRA is a partnership between you and the government. If, for example, there is $1 million in that IRA, your real share is $600,000. The government already owns the other $400,000.

When you convert to a Roth, you are buying out your partner. Then you own the whole thing.

To see what you gain by converting, look at the effect on your overall portfolio.

The conversion doesn’t change how much you really own, it just reorganizes things. It shrinks the pool of assets that are earning taxable income (you drew them down to pay the tax bill), and it expands the pool of IRA assets earning income that is tax-free and 100% yours.

The reorganization will cut your tax bill year after year.

The same financial reasoning applies to converting a traditional 401k to a Roth.

Another Reason to Love Roth

The taxes you save with an IRA depend on (1) the IRA’s size and (2) the IRA’s longevity. Roths stay fat longer. A traditional IRA must start paying you (and depleting itself) when you reach age 70½.

A Roth isn’t subject to any such rule. It can continue accumulating tax-free wealth for as long as you like. You’re not forced to tap into it before you want to.

And you shouldn’t want to until you really need to, when you’ve exhausted all your other liquid assets. Until then, it is better—your lifetime tax burden will be less—if you spend from assets that generate taxable income (the investments you own directly) instead of from the no-tax investments inside your IRA.

Your Estate-Planning IRA

Because your IRA should be the last thing to touch when you need cash, you’re not likely to spend it down to zero. Some investors never spend any of it.

Serious thinking about how to maximize the usefulness of your IRA leads to some surprising results. Because an efficient IRA strategy likely means not spending the whole thing, an IRA isn’t just a retirement vehicle.

It is also a tool for estate planning and for much more that you haven’t yet noticed.

Get My Report, Protect Your Estate Now: A Concise Guide to Family Wealth Protection

Learn how to protect yourself and your family from extreme market conditions, taxes, and lawsuits. Click here to learn more.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife