Let’s say the $3,000 is not ‘piss away’ money, but money you would have otherwise invested.
In 10 years that $3,000 is worth $7,781 (familiar number? It’s the benefit from my previous scenario – no coincidence). But you have to pay tax on the gain of $4,781 – at 30% that’s $1,434 in taxed that you have to pay because that money is not in a Roth.
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So let’s summarize all the options now that I know you won’t get the $3,000 from fluff.
To answer your specific question, at a 10% return and 30% tax rate – the time value of money is more than offset by the tax savings as long as you don’t use the IRA funds to pay the taxes.
Keep as-is:
$10,000 today will be worth $25,937 pre-tax, $18,156 post tax.
Convert and pay from other investments:
$10,000 today will be worth $25,937 pre and post tax (Roth)
You gave up $3,000 that would have turned into $7,781 pre tax and $6,347 post tax ($4,781 gain x 30%).
If you subtract this opportunity cost, your post tax amount in this scenario is $19,590. You saved $1,434 in taxes. Multiply that by every $10,000 you convert to get your savings.
This is the benefit of paying the taxes on the Roth conversion from funds other than the Roth. The benefit only gets bigger if you think taxes will increase in the future. If you have to pull it from the Roth, it makes no sense.
Unless…you believe taxes will be higher in the future.