Convert tIRA to ROTH now (26 y.o.) or not

[justian]

I have about 11k in a traditional IRA rolled over from a 401k from a short-lived job. Maybe about 10% is due to gains from investment.

I want to convert to ROTH as that money will be growing for the next 50-60 years. It seems like a good time to do it now, especially before I start making a significant gain in income later in the year. The concept of waiting until retirement and converting then doesn’t really apply here, correct?

Thanks!

 

[silence1111]

@justian You may want to reverse rollover into a 401k if you’re concerned about backdoor Roth IRA. Otherwise you have no information about why you would convert, but it’s usually a mistake. Converting now and paying taxes means losing the money to taxes there would otherwise also have 50 years to grow. That will usually perform better.

 

[justian]

@silence1111 Surely the taxes i pay now are less of a penalty than the money growing at ~6% every year for the next 50 years, then paying tax (at a higher bracket) on those distributions. Or am i wrong

 

[into_the_wilderness]

@justian The only thing that matters is the tax rate now vs. the tax rate in retirement. If the two tax rates are the same, there is no difference.

If you are in a low tax rate and can afford to pay the taxes, go for it.

 

[justian]

@into_the_wilderness Thank you!

 

[justanyone]

@justian for most people, yes you are wrong

 

[silence1111]

@justian You’re not thinking of it right. If you have $10,000 now and it will grow 10x over the next 50 years…

1. You convert to Roth and pay taxes. Let’s say 22%. Then you have $7,800 that can grow to $78,000 with no more taxes.
2. You leave it alone. $10,000 grows to $100,000, but you have to pay taxes. What are your taxes in retirement? Even if the tax brackets change to become higher, you may 1) have all brackets to fill with traditional withdrawal, and 2) have a lower top bracket because you are earning more now, when working, than you will when retired, for obvious reasons.

Assuming no change in taxes, conversion makes sense only if your current tax rate is lower than your effective tax rate on this money in retirement will be.