That's the subject of my article in the March/April issue of AARP Magazine, titled 'Roth Mania!'
You can read that article here.
The answer obviously depends on many variables, and I think that one of them doesn't get enough attention:
How soon will you have to spend the money you convert from a traditional IRA to a Roth IRA?
(Given my druthers and more space, I'd have devoted a couple of additional paragraphs of 'Roth Mania!' to that question alone.)
A Roth conversion has a price tag -- the income taxes you pay on the money you transfer from your traditional IRA into the new Roth IRA.
You won't come out ahead unless your new Roth IRA earns more than enough to cover that initial cost. That's going to take time -- and a decent investment return. Sure, a Roth IRA's earnings are tax-free. But even tax-free, an abysmal return is abysmal.
Some of the articles I've read quote financial advisers who suggest -- or at least imply -- that five years may be long enough.
I think that's much too optimistic.
In 'Roth Mania!' I wrote that it's going to take at least ten years for your Roth IRA earnings to exceed the cost of the conversion, and I wish that the words at least had been italicized.
If you believe that's overly cautious, consider the stock market's performance over the ten years that just ended. From the end of 1999 to the end of 2009, stocks traded on the New York Stock Exchange lost an average of 0.5% a year. It was the worst calendar decade for stocks in the past 200 years.
Many investors still haven't recovered from the shock. After all, in the previous decade --from 1989 through 1999 -- stocks earned an average 17.6% a year. And no matter how often we heard (and in my case, wrote) that those splendid annual returns were much higher than the long-term average, they grew to seem normal.
I'm not suggesting that this decade will be as bad as the last one. (God forbid!) I'm just pointing out that the market can deliver considerably less than its historic average annual return of about 10% to 11%.
When you calculate whether or not a Roth conversion is worthwhile, I wouldn't assume a more than 10% average annual investment return going forward. If you want to play it safe, figure on a more modest 6% return if you invest in stocks, less if you invest in bonds.
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved
Comments