Financial PlanningRoth Conversions – Dispelling the Opportunity Cost Argument, by Ed Slott

Have you heard about the opportunity cost argument against Roth conversions?

Some believe there is a lost opportunity cost by doing a Roth conversion because they argue that the funds used to pay the conversion tax could have been otherwise invested, and that investment return opportunity is lost.

Well, I’m here to dispel this argument –it’s false because there is no opportunity cost in terms of lost investment gains if the tax rates are the same both at conversion and later at distribution. Still don’t believe me?

Click here to download “Roth Conversions –Dispelling the Opportunity Cost Argument” to check out the math behind my argument!

For professional assistance evaluating Roth conversion strategies, contact our office at (425) 252-4032 to schedule a time to visit.

 

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Ed Slott is not affiliated with Bailey Wealth Services or LPL Financial.

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