Craig Wear explains why break-even analysis fails for Roth conversions: it assumes you'll live to a specific age and markets won't change. He proposes tax-adjusted net worth instead, which accounts for what you actually own after taxes. Think of a traditional IRA as $1,000 in hand but $300 owed to the IRS.
Every break-even number is built on 2 really big assumptions, and neither one is really knowable. So here's the first. A break-even at age 83 assumes you're still here at 83 to see it, which is why a lot of people just walk away. The second assumption is that you're going to have a stable market. Better returns pull that break-even in sooner. Worse returns push it out further. So the real problem with hanging your hat on these numbers is that break-even asks you to predict the future. And I don't know about you, but I can't do that. But there is a solid mathematical conclusion that asks you to predict very little. So let's say you've got $1,000 in your pocket and you owe your buddy $300. How much money do you actually have that's yours if you intend to fulfill your other obligations? $700. Your traditional IRA is that money in your pocket and the IRS is, well, your buddy in this case. You just haven't settled up yet. Now, what I'm describing is something we call tax-adjusted net worth, and it's much more effective than breakeven for determining if Roth conversions are going to be right for you.
