How about Roth IRA to traditional?

I here a lot about traditional to Roth IRA, but not vice versa. Is it possible to contribute to a Roth IRA for 4 years now and then switch funds to traditional IRA? Or just better to start fresh 4 years from now with a traditional IRA (unless Roth income limit changes)?

With Roth IRA over 4 years of contributions ( roughly 20000K total), I am compounding yearly [Future value = current value (1+avg interest rate)^years] at 5.5%, and I get only like 130K at age 60. Seems like a poor investment for 30 years.

Would it better to just go with a traditional IRA from the beginning or something else?

That's an interesting question. However, the rules do not allow you to convert a Roth IRA to a regular IRA. Actually, people are trying to find ways to contribute to Roth accounts - not vica versa.

I guess you could close out your Roth IRA, and use that money to fund a traditional IRA. You would only be taxed on the growth within the account. So if you contributed $4k to a Roth, and it's now worth $5k, you could withdraw all the money from the Roth, and pay taxes and a 10% penalty on the $1k of earnings.

I've never had a client ask me about this strategy, nor have I recommended it to anyone. However, I'm sure there is a situation where one could argue that it might make sense.

It only makes sense if the OP is interested in double taxation.

The reason it's easy to convert from traditional to Roth (I just did so on Monday, actually) is because the conversion is counted as taxable income in the year of the conversion, so the money transfer is from client --> IRS. If we're talking about converting from Roth to traditional, then the money transfer would be from the IRS --> client, and word has it the IRS just isn't nice and giving like that. 😛

Not to mention the double taxation: the money in your Roth is post-tax, so if you somehow recharacterized that to pre-tax income, you'll have to pay taxes upon distributions when you are in your 60's. WHY?

You can have both accounts open at the same time. Actually, when I converted my traditional to Roth, I noticed that Vanguard didn't close the traditional. It's open with a balance of $0.00. But still available.

1) If your income level is too high to contribute to a Roth right now, simply open up a new traditional IRA and contribute to that.

2) If you are concerned that your current holdings in your Roth are too conservative for you or whatever reason, you can move your Roth IRA to somewhere else and still manage it yourself and choose new funds/stocks/vehicles to hold in it. It doesn't have to be 5.5% fixed income forever.

Good luck!


Edit: To answer your question directly:

m3unsure said:

I here a lot about traditional to Roth IRA, but not vice versa. Is it possible to contribute to a Roth IRA for 4 years now and then switch funds to traditional IRA? Or just better to start fresh 4 years from now with a traditional IRA (unless Roth income limit changes)?

Click to expand...

If the Roth contribution income limits do not change after you finish residency, then open up a traditional IRA then and contribute to that. But leave the Roth open. You can have both types of accounts open simultaneously and you can even contribute to both types of accounts in the same year (however the contribution limit is $5000 combined, not for each account). It really depends on your tax situation now and in the future. Bush also signed something into law that will remove the income ceiling for Roth conversions in like 2010 (or 2011), so even if you cannot contribute directly to a Roth as an attending, you can contribute to a traditional IRA and convert it once per year if you like.

AndyFromMDTAXES said:

That's an interesting question. However, the rules do not allow you to convert a Roth IRA to a regular IRA. Actually, people are trying to find ways to contribute to Roth accounts - not vica versa.

I guess you could close out your Roth IRA, and use that money to fund a traditional IRA. You would only be taxed on the growth within the account. So if you contributed $4k to a Roth, and it's now worth $5k, you could withdraw all the money from the Roth, and pay taxes and a 10% penalty on the $1k of earnings.

I've never had a client ask me about this strategy, nor have I recommended it to anyone. However, I'm sure there is a situation where one could argue that it might make sense.

Click to expand...

Actually, you can re-characterize a ROTH into a traditional. I know because of my tax filing situation after getting married, I had to do it so I didn't have to pay 6% on over contributing to a ROTH.

The only reason why I could see you would want to do what your proposing is if you aren't going to be making more than $50K a year, and are never going to be in the higher tax bracket, and find that your tax deductions from the traditional would be a greater long term benefit to you thanin 50 years.

One important thing to keep in mind is that nobody knows what taxes will be like in 30 years.

Taxes, without a doubt, will be higher. Consider the fact that currently there is 1 retired person for every 5 working adults. 20 years from now, there will be 1 retired person for every 3 working adults. What does this mean to you and your retirement? The decreasing number of working adults to support retired persons means higher taxes to support social security and Medicare. After the baby boomers nearly bankrupt the system, the successive generations will be paying even more to bail it out -- if it survives.

I am firmly convinced that taxes will increase by the time we all retire. Will we still have an income tax, or will we transition to a sales tax/value added tax type system?

This is why I think it is best to keep both a Roth IRA/401(k) and a traditional IRA/SEP-IRA/401(k). Put everything in a Roth and we transition to a sales tax system instead of the income tax system and you're double taxed. Put everything in a traditional system and we increase taxes in the future, and then you're paying a much higher tax.