Thoughts On Roth IRA Conversions -- December 7, 2024

Locator: 44513ROTH.

Thinking of converting a traditional IRA to a Roth IRA?

Think again. Forbes, November 28, 2024. 

Also, at WSJ, November 28, 2024. 

Barron's, December 6, 2024.

Trump -- Barron's:  December 2, 2204. 

These articles start appearing about this time every year. It started a few years ago when folks realized that RMDs seem to be so unfair. 

Many folks in my age group have traditional IRAs because "the Roth" was not available when we first started investing to achieve financial independence. So, like many folks, I suppose, I have several IRAs (and other retirement programs, also) that require RMDs. 

My siblings have recently been discussing converting their traditional IRAs to Roth IRAs. 

Be that as it may.

But this is what I find simply amazing: traditional IRAs first became available in 1974. I probably started my first IRA around 1985. So, for forty years -- forty years -- my traditional IRAs have been growing tax-free -- tax-free for forty years. 

In 1998, when Roth IRAs became available, I opened a couple of Roth IRAs, but continued to contribute to my traditional IRAs (because they were doing so incredibly well) as well as the new Roth IRAs, so now I have a mix, but still mostly traditional, simply because they have been around longer (1974 vs 1998 -- 24 years longer). 

And now, after forty years of growing tax-free, the government is asking me to cash in about 4% this year, and pay exorbitantly high taxes on that 4% -- probably a marginal tax rate of 25%? After taking out that 4% I will still have 96% of my traditional IRAs and next year will have to take out somewhere between 5 and 6%, I suppose. 

I don't like paying federal taxes (we have no state income tax in Texas) but I can't get all that upset about having to take RMDs and pay taxes. My wife certainly doesn't mind. I take my RMDs and give her a portion off the top in cash -- cash that she would not have otherwise seen. Likewise, that cash is now moving over to our grandchildrens' accounts. Sure, they would eventually see it -- but now they get the satisfaction of seeing their own personal accounts grow. 

Sure, I could do the same with Roth IRAs, but take distributions when I want, but in the big scheme of things, I just can't get too upset about the requirement for RMDs from traditional IRAs. Forty years of growing tax free and I assume the rate of growth will exceed the annual RMD.