Analyzing a Roth Conversion

Neal B. Hitzig, PhD, CPA

Recent relaxation of restrictions on conversions of retirement accounts into Roth IRAs has motivated renewed interest in attempts to measure the economic value to a taxpayer of a conversion. As tax planners know, analysis requires assumptions as to future tax rates, as well as to returns on invested assets over the period until the withdrawal of funds. However, an analysis itself may be flawed, notwithstanding the data assumptions, because the analysis fails to consider a major factor that affects a conversion decision. That factor arises from the need to choose between paying income tax on the converted funds from within the converted accounts or from outside funds.