Tax rate risk is significant in both directions. We can't discuss specific tax proposals here, but obviously some current proposals would make conversions that many of us have already done over the years grossly excessive and tax-inefficient. The nature of conversions is that you don't get a do-over when you're impacted by an unanticipated tax policy change, like we've already seen happen with the 10-year inherited IRA rule (which might have caused some people to wish they'd done more/larger conversions when they'd had the opportunity.)I have always found McQ's papers to be thought-provoking, and this one is no exception. The paper's primary focus is to examine the effects of conversion on RMD taxation. However, I believe an important motive in favor of conversion that is not discussed in the paper may be derived from the argument “that future tax rates are unknowable and this uncertainty needs to be incorporated into the decision process around Roth conversions.”
As the paper points out, tax rate risk makes conversion tax arbitrage inherently risky. This tax rate risk is entirely embedded in the unconverted traditional IRA. Unlike a traditional IRA, a Roth IRA has no future tax liability, making it immune to tax rate risk. For example, a TIPS ladder held in a Roth, but not in a traditional IRA, can provide a guaranteed level of real after-tax spending. This risk mitigation should be a strong motive for risk adverse retirees to consider conversion, even with a slightly negative expected tax-arbitrage return.
Statistics: Posted by tibbitts — Sun Sep 08, 2024 9:27 pm — Replies 62 — Views 6752