Apologies for the newbie question. Trying to weigh the pros and cons of a 401(k) to Roth IRA conversion. I’m in my 30s.
From what I understand, the benefit of converting to a Roth is to pay (ideally fewer) taxes now rather than in retirement. I’ve seen a lot of people say you should compare your current tax rate with the tax rate you assume you’ll be when you need the money.
My question is, even if you assume a lower tax rate in retirement, wouldn’t it almost always make sense to do the conversion if you’re young, given the years of compounding tax-free growth?
For example: Converting a $25k 401(k) to a Roth IRA at age 35, you might pay roughly $5k in taxes at a 20% tax rate at the time of conversion.
However, assuming 30 years of growth at about 7%, in retirement you could expect to have roughly $200,000. Even if that $200,000 were taxed at half the rate (10%), you’d still be paying about $20,000 in taxes — almost four times the amount you’d pay by converting young!
Can someone smarter than me tell me if I’m missing something? Trying to make sure I’m not making a mistake!
tl;dr — It seems like decades of tax-free growth would always outweigh a difference in tax rates when considering a Roth conversion while you’re young, but I could be wrong!
EDIT: I see my mistake now — thank you to everyone who commented! This is why I love this sub!
Submitted August 19, 2022 at 10:43PM by BatStock9040 https://ift.tt/fm6qS53
