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March 14, 2008

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Early Retirement Extreme

Converting my 401k (or IRA as it may be) into a roth is what I plan to do as well. However, do you know/think/guess if this opportunity for conversion will exist in say 10 years. I have gotten the impression that it was temporary?

Retired Syd

To sort of answer your question: First, the tax law that allows you to convert your traditional IRA to a Roth is not "temporary", i.e. it's not a law that is scheduled to "sunset".

As to whether it will be around in another 10 years, well now, that's another story. In the alternative world that is tax law, that is a very long time--with very likely political changes, that could always be legislated away.

However in all the areas I hear rumblings of change, (most notably estate tax, capital gains rates, and ordinary income rates), I have not heard rumblings of this area being a target.

Lise

For someone my age who plans to retire at around the same time, I am thinking it probably makes the most sense to keep my traditional IRA until I do retire, at which point I should convert to a Roth piece-by-piece until 59 1/2, like you're doing. Would you agree?

(This is, of course, assuming that tax laws and retirement plans look at all the same in another 20 years).

Retired Syd

Assuming that you are in a higher tax bracket right now (while you are working) than when you retire, that's right. Otherwise you would be picking up the conversion income at higher rates than you would have experienced anyway by just keeping it in a traditional IRA.

Keep in mind that if your pre 59 1/2 bracket isn't any lower than your post 59 1/2 bracket it may not make sense to do it at all. It usually only makes economic sense if you can pick up the conversion income while in a lower tax bracket than the one you would have when drawing the distributions when retired, if that makes sense. (And yes, 20 years is even a longer time in tax world, not sure the rules will even resemble those that are on the books right now!)

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