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- Title
Measuring the Financial Consequences of IRA to Roth IRA Conversions.
- Authors
Welch Jr., James S.
- Abstract
The tax code permits the conversion of IRA funds to a Roth IRA provided that personal income taxes are paid on the IRA distributions. Common motivations for IRA to Roth IRA conversions are to increase retirement disposable income, insure against future tax increases, and allocate retirement savings to minimize combined taxes for retirees and their heirs. This paper quantitatively assesses the financial consequences of making conversions with respect to these motivations. Our laboratory was a linear programming retirement planning calculator that, given a set of assumptions and constraints, computes retirement cash flow that maximizes disposable income by minimizing taxes and maximizing compounded asset returns. Disposable income is our metric for evaluating different assumptions, such as doing or not doing conversions. Our results are that partial conversions early in the optimal plan increase disposable income by around 1 percent in most situations. Conversions reduce total income taxes paid by 19 percent as they shift taxes from later in retirement to early in retirement. Pre-positioning savings for inheritance purposes can be accomplished with minor reductions in disposable income.
- Publication
Journal of Personal Finance, 2016, Vol 15, Issue 1, p47
- ISSN
1540-6717
- Publication type
Academic Journal