Originally Posted by
echappist
care to elaborate why you converted? I have the option to do either and have thought about this for a while.
As you likely know, if you convert you'll pay income tax now on the amount that you put in a deductible IRA, and the gains, in the conventional IRA. (you don't have to pay taxes on amounts that you put in a non deductible IRA, just on the gains.) But you don't have to pay taxes again on withdrawls from the Roth IRA.
So the question becomes whether the value of having the money in your Roth IRA growing tax free trumps the value of the Tax defferal in the conventional IRA. To answer this question, you have to know 1) the amount of money your looking to convert, 2) your current tax bracket, 3)your age (i.e. number of years before you'll draw the money out), 4) your assumed rate of return, and 5) the assumed tax rate when you'll withdraw the money.
If you have all those numbers, you can run the calculations and come up with an informed guess, but it's still a guess because you can't know with certainty the rate of return, and the future tax rate. If you're good with financial calculations, you can do this yourself, if not, its worth paying a fee base financial planner to do it.
The reason a number of people are doing the Roth conversion this year is the assumption that rates (particularly on income over $250,000) will be higher next year, and with long term demographic trends will be higher years from now when you take the money out in retirement.
However, you also have to realize that when you make the Roth IRA conversion, you are trusting the Government not to change the Tax law. While earnings in Roth IRA's aren't taxed now, there's nothing to prevent a future Congress from taxing them, other than political outrage. My guess is that they won't directly tax Roth IRA's but they can easily screw you indirectly by counting Roth IRA withdrawls in your Gross income for the purpose of determining your tax bracket, and for means testing Social Security, and Medicare, which is coming, its only a matter of when.
Personally, I've decided not to convert a small non deductible IRA to a Roth, mostly because of how my age affects the calculations, but also in part because I don't trust the government enough to voluntarily increase my current tax bill, with the promise they won't tax me again, and also partially inertia.
That said, if your younger, make different assumptions about future tax rates,and expected rates of return, your answer may well be different.