Craig Wear, CFP, explains why Roth IRA conversions can backfire if you ignore required minimum distributions and long-term tax bills. The math matters more than just comparing today's tax rate to tomorrow's. Run the numbers before you convert.
Roth conversions can backfire. Hold up. Here's the math. You're going to pay taxes now on the whole amount that you convert. And if you pay a tax rate that stays the same in retirement, you maybe don't have a whole lot of gain if the taxes go down and you lose money. And if taxes go up, then yeah, it can help. That's what a lot of people think. But actually your decision to do conversions has very little to do with tax rate now versus tax rate later. It has more to do with the massive amount of taxes that those required minimum distributions are going to throw into into your life if you don't get the conversion. So don't listen to the naysayers. Don't listen to people tell you that the math says the only reason you should convert is if taxes are going to be lower in the future. That's a one dimensional approach and they have totally missed the point of looking at all the other costs that are going to accrue because you left the money in for too long. So bottom line, know your numbers before you make the switch.
