Actually, I think the main point of the article and what I got out of it is that a traditional ira gives you flexibility on when to pay the tax.
Also, when you did the calculation for the conversion, you didn’t incorporate that we have a progressive tax system in the US (THIS IS CRITICAL). That first 17k in conversion is not taxed at all. The next 16k is at 10%, the next 49k is at 15% according to the article and rest is 25% about 10k. Rough estimates bring that out to around 20k in tax. However, this is also critical, is that you don’t HAVE to do a full 100% conversion in any given year. You can do any amount based on your circumstance that year.
A lot of people look at 2010 and look at how anyone can convert to a Roth, but people were able to do IRA conversions for a while. In my own case, I have converted during a job transition year and paid about 6% tax that whole year. Assuming most readers here are aged 30-40, you have a good 30-40 years before mandatory required minimum distributions.
Also, a lot of financial professionals will probably tell you to NOT do a 100% conversion. The whole goal is to keep the conversion amount in a lower tax bracket so say, if you’re lucky enough to retire at 59 1/2, you can convert every year with no other income (delay social security) till 70 1/2 and in short order (say 10 years till 70 1/2, convert 800k (80k per year) paying 15% tax only). Move to an income tax free state first of course. 🙂
You can convert a bit every single year and that’s the power of the traditional ira vs. the roth 401k where you already paid the highest income tax bracket of your income. The key is that the roth 401k tax is paid at your highest tax bracket while unless you have a pension, the income you take from a traditional ira is at the lowest bracket…
Hope that makes sense. 🙂
Again, I’ve been in the Roth camp for a while, but unless you have really high retirement income from social security or pensions, there really is no other income source to fill your exemptions, deductions, etc…
