Roth / IRA conversion

In the case study "Convert Your IRA to a Roth!", it says to withdraw $300000 from the IRA and contribute $300000 to the Roth. Wouldn't the amount contributed to the Roth be less than the withdrawal due to taxes on the withdrawal? Also, do you need to start the smoothing for income after the withdrawal(s) for the Roth conversion? It seemed to include the special withdrawal in the smoothed income if I didn't do this.


dan royer's picture

Well, ESPlanner will calculate the tax consequences of this conversion, but it will not impose the 10% penalty that you would create if you did not complete the conversion properly. So the case study assumes you have 300,000 to put in the ROTH according to the rules of conversion and that you are paying the tax consequences out of your own regular assets. The withdraw and the contribution happen in the same year so they cancel each other out in that respect that I think you are asking about.

Thanks for the quick response. So, does the program automatically transfer the tax difference from the regular assets, or do you need to do this manually? If it needs to be done manually, how would I find the amount to transfer?

dan royer's picture

It does the tax calculation for you and you should observe that you are paying higher taxes in that year of the conversion. The program is seeing the withdraw from the IRA and taxing you for that. It will show higher taxes for that year. I just ran a 11,000 ROTH conversion in my own model and it lowered my lifetime discretionary spending by $100 per year. So it doesn't always pay to do so.

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