When you contribute to a traditional Individual Retirement Account, the government lets you deduct that money from your taxable income that year. When you contribute to a Roth IRA, you don't get that immediate tax benefit -- but you get to withdraw your money from the account tax-free in retirement. The government also allows savers to convert from a traditional to a Roth, but they have to pay taxes to do so. A reader named Ron is thinking about converting his traditional IRA to a Roth, but wants to know when he would have to pay the taxes. DailyFinance's Laura Rowley explains.

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Suffice to say Uncle Sam wants tax on your money when you earn it, when you save it, when you withdraw it, when you spend it, when you give it away and when you die. That is I think a pretty good rule of thumb although I am not an accountant. Am I wrong to think that the tax rate would be lower when you are retired because you no longer have any real income from employment?

November 09 2011 at 11:40 PM Report abuse -1 rate up rate down Reply

when you withdraw money from your ira, whether converting to a roth or otherwise, it becomes part of your gross income for the year in which it is withdrawn and you'll pay the same tax on it either way. . . so it seems more logical to do the roth conversion and take the future interest and/or dividends from same tax free. but you should do it asap as this pernicious president and the venal democrats will always be wanting to raise the tax rate.

November 09 2011 at 11:22 PM Report abuse rate up rate down Reply

If you have a Roth IRA when you are retired and collecting Social Security it can make your SS taxable. Once you start taking your Roth monies it can cause your Social Security to become taxable if your over the $25,000 limit on SS.
So why do a Roth IRA?

November 09 2011 at 8:47 PM Report abuse rate up rate down Reply

I don't think you answered his question. If any of the IRA was a non-deductable IRA, that amount would NOT be subject to income taxes. However, the sum of all DEDUCTABLE IRA contributions with the benefit of a deduction in the year it was made) and the CAPITAL GAINS or growth would all be subject to tax.

When I did my calculation, for example, 87% of my total IRA would be taxed as income. So, rather than contribute to a ROTH IRA or 401(k) at work, in which I would be taxed on 100 cents on every dollar put in, I can delay that (or use a non-ROTH option), obtain that tax deduction THIS YEAR (for new money contributed) and the convert my old IRA in which I will only pay taxes on 87 cents of every dollar converted. It made sense for me. You also cannot "cherry-pick" the favorable accounts, only the ones that were non-deductable, or those that have mnot grown (or lost money).

Because we are talking about paying taxes NOW in exchange for future growth, the age and number of years of future growth also makes a difference.

I would agree that he should consult a tax adviser or trusted fee-only financial adviser to help him decide if this is favorable and beneficial to him.

November 09 2011 at 4:34 PM Report abuse rate up rate down Reply
Zenek Wisniewski

You do not subtract the amount contributed to a traditional IRA from taxable income. You subtract the amount contributed from total income in arriving at adjusted gross income. Whoever, wrote this piece should see a tax accountant or tax preparer. Once you get to the point of taxable income, there are no more subtractions.

November 09 2011 at 12:06 PM Report abuse rate up rate down Reply