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Letters
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Business New Haven
11/16/1998
By: BNH
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To the Contrary
The September 21 BNH featured an article, “Is There a Roth IRA in Your Future?” It provides good insight into the differences between a traditional IRA and a Roth. However, it perpetuated some myths in determining whether you should convert to a Roth IRA.
Myth No. 1: You should not convert to a Roth IRA if your retirement income-tax rate is likely to be lower than your pre-retirement rate (or at the time you make contributions or convert).
This is probably the biggest myth. The main desirability of IRAs and Roth IRAs is the tax-advantaged compounding. Compounding advantages of a Roth IRA include: no minimum distribution requirement at age 70 1/2; and tax-free compounding in the hands of the beneficiary. It has the potential to result in a much larger balance even if the post-retirement income tax rate is lower than earlier rates.
Myth No. 2: A Roth IRA conversion is not favorable until you have held the assets for ten to 12 years.
The are so many variables that affect the desirability of a Roth IRA conversion that there is no way one can make a general statement about how fast a conversion outperforms non-conversion. Indeed, there are cases in which one is better off immediately upon converting.
Myth No. 3: A Roth IRA conversion is not a good idea for an older person.
We have seen that conversion makes sense for many people in their 50s, 60s and 70s. If an older adult sticks with a traditional IRA, required distributions will quickly whittle away at the tax advantage compounding. The Roth does not require any distributions as long as the investor and spouse are living. The beneficiary who then takes distributions over his/her life expectancy can take advantage of tax-free compounding.
Myth No. 4: Roth IRAs make more sense for persons with smaller IRA balances.
Just the opposite - IRA owners with larger balances are more likely to take advantage of the tax-free compounding than those with limited assets.
The comments made by the contributing professionals might steer people away from converting to a Roth IRA for the wrong reasons. Certainly, I concur that no one should act hastily in converting from a traditional IRA to a Roth. However, it is necessary to determine what makes sense in each individual's circumstances.
- Alan P. Weiss
President
Regency Retirement Planning
Woodbridge
So there.
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