Would it ever be a bad idea to convert a traditional IRA to a Roth IRA with the following assumptions?
Taking all your assumptions: With Roth, you take $6112 from work, (let's call you tax rate 10%) pay $612 in taxes, and contribute $5500 (the max if you are younger than 50).  This $5500 will grow to $21,283 in 20 years at 7% annual growth ($5500*(1.07^20)), and you will pay no additional taxes on it. With the traditional IRA, you take $6112 from work, pay $612 in taxes, and contribute $5500.  You will receive a tax deduction at tax time of $612 for the contribution.  This money will also grow to $21,283.  This will be taxed at your ordinary income rate (which we're calling 10%), costing you $2123 at the time of withdrawal.  You will have $19,155 left over. EDIT: If you invest your tax savings from every contribution to the Traditional IRA, then the numbers wash out.  Perhaps a pivotal question is whether you believe you will have greater taxable earnings from your investments in retirement than you have in taxable earnings today -- affecting the rate at which you are taxed. Even if you're paying a lot of taxes now, you're talking marginal dollars when you look at current contribution, and average tax rate when making withdrawals.  IE, if you currently pay 28% on your last dollar (and assuming your contribution is entirely in your marginal rate), then you're paying 28% on all of the Roth contributions, but probably paying a lower average tax rate, due to the lower tax rates on the first many dollars.   Look at the overall average tax rate of your expected retirement income - if you're expecting to pull out $100k a year, you're probably paying less than 20% in average taxes, because the first third or so is taxed at a very low rate (0 or 15%), assuming things don't change in our tax code.  Comparing that to your 28% and you have a net gain of 8% by paying the taxes later - nothing to shake a stick at. At minimum, have enough in your traditional IRA to max out the zero tax bucket (at least $12k).  Realistically you probably should have enough to max out the 15% bucket, as you presumably are well above that bucket now.  Any Roth savings will be more than eliminated by this difference: 28% tax now, 15% tax later?  Yes please. A diversified combination is usually best for those expecting to have a lot of retirement savings - enough in Traditional to get at least $35k or so a year out, say, and then enough in Roth to keep your comfortable lifestyle after that. The one caveat here is in the case when you max out your contribution levels, you may gain by using money that is not in your IRA to pay the taxes on the conversion.  Talk to your tax professional or accountant to verify this will be helpful in your particular instance. "To answer your question point by point - I'd focus on the last point. The back of my business card -  Let's focus on Single. The standard deduction and exemption add to over $10K. I look at this as ""I can have $250K in my IRA, and my $10K (4%) annual withdrawal will be tax free. It takes another $36,900 to fill the 10 and 15% brackets. $922K saved pretax to have that withdrawn each year, or $1.17M total.  That said, I think that depositing to Roth in any year that one is in the 15% bracket or lower can make sense. I also like the Roth Roulette concept, if only for the fact that I am Google's first search result for that phrase.  Roth Roulette is systematically converting and recharacterizing each year the portion of the converted assets that have fallen or not risen as far in relative terms. A quick example. You own 3 volatile stocks, and convert them to 3 Roth accounts. A year later, they are (a) down 20%, (b) up 10%, (c) up 50%. You recharacterize the first two, but keep the 3rd in the Roth. You have a tax bill on say $10K, but have $15K in that Roth."
Luke, I'd like to point out some additional benefits of the Roth IRA accounts 1) Going Roth, you can effectively increase the amount of your contribution to your IRA account. In your example, you are assuming that your contribution to Roth IRA is in fact $ 85 ($100 less $ 15 tax paid). In reality, albeit more costly, Roth IRA allows you to contribute full $ 100 ($117.65 less $ 17.65 tax incurred.) Using this method you can in fact grow your tax-free funds to $ 1.006.27 over 30 years. The larger you effective tax rate is, the larger will be the difference between your maximum effective Traditional vs Roth IRA contribution will be. 2) Should you need to access your IRA funds in case of emergency (unqualified event of not buying your first home, nor paying for your college education), Roth IRA account contributions can be withdrawn without incurring the 10% penalty charge, that would be imposed on your unqualified Traditional IRA distribution. 3) As other contributors noted it's hard to believe that lower US tax rates would prevail. Chances are you will be contributing to Traditional 401k later throughout your work life. Having a Roth IRA account would afford you a tax diversification needed to hedge against possible tax rate hikes coming in the future. Considering the gloomy future of the Social Security funding, and ever-growing US national debt, can we really expect for there to not be any tax rate increases in the next 20-40 years?! By the way, as others pointed out your effective tax rate will always be lower than your marginal tax bracket. "To keep it simple, I will keep the focus between a Trad IRA and a normal Taxable account (Roth's and 401(k) add more complications that make another problem).  I will also assume, based on the question, that you aren't able to deduct the IRA contributions. Also, a Roth is better in every way than a non-deductible Trad IRA so the ""backdoor Roth"" mentioned in other answers is probably the way to go and this is more of an academic exercise.  Ok, so why bother with the IRA if you're taxed anyway?  Because you aren't taxed as you go! With a normal non-tax-advantaged account you have to pay taxes every year on any realized capital gains and dividends (including fund distributions). Because of the compounding nature of savings, delaying paying taxes is in your best interest.  Simple example:  Taxable Account: IRA Account: Now, this is a very simplified example. If you're more tax-conscious (i.e. more buy-and-holding), you can delay paying some of the long-term cap gains in the taxable account, but any short-term cap gains (including distributions from the underlying funds) will be at your marginal income tax rate.  A few other observations: EDIT: I set up a spreadsheet where each year I deposited $1000 for 35 years. Each year, the balance in the IRA account grows by 5%, but the taxable only by 5%*(1-0.15) = 4.25% due to the effect of taxes. At the end of 35 years, my simulation assumes you pay 15% on all the gains in the IRA, which would likely not be the case, but easier than forecasting through retirement and demonstrates what I'm trying to show. Here's plot showing the balance in the various accounts, the blue is the IRA account, orange the taxable account, and grey is the effective balance of the IRA, after paying taxes on the gains:   And here's a plot of the advantage of the IRA (after paying taxes on the gains), vs the taxable account:  Whether that's worth it to you or anyone depends on some the assumptions in the simulation, especially effective tax rates, and growth rates, as well as any personal issues. Some people may be less likely to raid an IRA account, for example, than a normal account. Conversely, if you have a project coming up, you may need something a bit more liquid than an IRA." Does the 5 year rule apply on the After-tax 401k -> Roth 401k -> Roth   IRA conversion of the 20000 (including 10000 earnings that was   originally pre-tax)? No. The after-tax amounts are not subject to the 5 years rule. The earnings are. How does this affect Roth IRA withdrawal ordering rules with respect   to the taxable portion of a single conversion being withdrawn before   the non-taxable portion? Taxable portion first until exhausted. To better understand how it works, you need to understand the rationale behind the 5-year rule. Consider you have $100K in your IRA (traditional) and you want to take it out. Just withdrawing it would trigger a 10K statutory penalty, on top of the taxes due. But, you can use the backdoor Roth IRA, right? So convert the 100K, and then it becomes after-tax contribution to Roth IRA, and can be withdrawn with no penalty. One form filled ad 10K saved. To block this loophole, here comes the 5 years rule: you cannot withdraw after-tax amounts for at least 5 years without penalty, if the source was taxable conversion. Thus, in order to avoid the 10K penalty in the above situation, you have a 5-year cooling period, which makes the loophole useless for most cases. However amounts that are after tax can be withdrawn without penalty already, even from the traditional IRA, so there's no need in the 5 years cooling period. The withdrawal attribution is in this order: Roth IRA rollovers are sourced to the origin. E.g.: if you converted $100 to the Roth IRA at firm X and then a year later rolled it over to firm Y - it doesn't affect anything and the clock is ticking from the original date of the conversion at firm X. 5-year period applies to each conversion/rollover from a qualified retirement plan (see here). Distributions are applied to the conversions in FIFO order, so in one distribution, depending on the amounts, you may hit several different incoming conversions. The 5 years should be check on each of them, and the penalty applied on the amounts attributable to those that don't have enough time. 5-year period for contributions applies starting from the beginning of the first year of the first contribution that established your Roth IRA plan. The penalty applies to the amounts that were included in your gross income when conversion occurred, i.e.: doesn't apply on the amounts converted from after-tax sources. Note the difference from the traditional IRA - distributions from pre-tax sources are prorated between the non-deductible (basis) amounts and the deductible/earnings amounts (taxable). That is why the taxable amounts are first in the ordering of the distributions. I know in the instance that if my MAGI exceeds a certain point, I can   not contribute the maximum to the Roth IRA; a traditional IRA and   subsequent backdoor is the way to go. My understanding is that if you ever want to do a backdoor Roth, you don't want deductible funds in a Traditional account, because you can't choose to convert only the taxable funds. From the bogleheads wiki: If you have any other (non-Roth) IRAs, the taxable portion of any   conversion you make is prorated over all your IRAs; you cannot convert   just the non-deductible amount. In order to benefit from the   backdoor, you must either convert your other IRAs as well (which may   not be a good idea, as you are usually in a high tax bracket if you   need to use the backdoor), or else transfer your deductible IRA   contributions to an employer plan such as a 401(k) (which may cost you   if the 401(k) has poor investment options). Right you **don't** ever want to use that account for your traditional 401k rollovers.  Realistically, you could *probably* still have it reclassified as a traditional IRA and roll your traditional 401ks into it, which was basically your original idea except none of the funds would be Roth; but if you see yourself ever potentially contributing to a Roth IRA going forward (which makes all the more sense if you have only traditional 401k funds in your retirement portfolio so far), there's nothing *wrong* with having both types of IRA at the same time.  But no, don't cross the streams!  :) ok if you haven't rolled in the 401k assets yet, you're fine and should put them into a traditional.  if your earnings + roth conversions will put you at or below your anticipated tax bracket during retirement, then the roth conversion might make sense.  in some cases, employers will give you a roth 401k option, but you are right that it's not the default. Another, completely different way to look at your huge mistake: It's not a huge mistake. You're getting your money out of a restricted account.  You're paying taxes now (plus an extra tax of 10%) to regain some of your privacy of where you're putting your money. You're paying up now as a trade-off to paying much later, when the rules can be completely different and the tax rates much higher. You're deciding not to put the money into another restricted account, which has yearly reporting requirements to the IRS above and beyond those required with taxable earnings. It's a cost-benefit analysis whether you roll your money over to an IRA account or not.  You hear about the benefits a lot more often than you hear about the costs, which it what I'm introducing you to with my answer. "The extent that you would have problems would depend on if the annuity is considered Qualified or Non-Qualified. If the annuity is qualified that means that the money that was put into it has never been taxed and a rollover to an IRA is simple.  The possible issues here are tax issues and a CPA is likely the best person to answer this question.  Two other things to consider in such an event is the loss of any 'living benefit' or 'death benefit'. Variable annuities have been through quite the evolution in the last 15 years. Death benefits have been around longer than living benefits but both are usually based on some derrivitive of a 'high water' mark of the variable sub accounts. You might want to ask Hartford the question ""...how will my living or death benefits be affected if I roll this over""." "Like JoeTaxpayer said, I don't know of any difference between the backdoor and a regular Roth IRA contribution besides the issue with existing pre-tax IRA money. So if it is your practice to contribute at the beginning of the year (good for you, most people wait until the last minute), then doing a backdoor seems like the safe choice. Some people have speculated that, hypothetically, the IRS could use the ""step transaction doctrine"" to treat it as a single direct contribution to a Roth IRA (which then would be disallowed and cause you a penalty until you take it out), but I have never heard of this happening to anyone. As for the paperwork, you just need to fill out one extra form at tax time, Form 8606 (you need to complete two parts of it, one for the non-deductible contribution, and one for the conversion). It is pretty straightforward. (Although I've found that it is a pain to do it in tax software.) Another option would be for you to contribute to a Roth IRA now, but when you discover that you're over the limit at the end of the year, re-characterize it as a Traditional contribution and then convert it back to Roth. But this way is not good because then there is a long time between the Traditional contribution and the Roth conversion, and earnings during this time will be taxed at conversion." You can withdraw the principal of your Roth IRA account (i.e.: the amounts after tax deposited there) without a tax. However, in case of conversion - you have to wait for five years before you can do that. Otherwise, 10% penalty will apply. It is actually mentioned in the article you linked to. Taxable portion in that context is the portion you paid tax on when converting. In the case you described (converting your 401k) that would be the whole amount of the conversion. For reporting purposes, most IRA firms prefer that you roll the 401(k) funds into a Rollover or Traditional IRA and then convert to the ROTH from there. The mid-air conversions (401(k) directly into a ROTH) can get tricky when you go to do your taxes the following year if the 1099 form from the releasing custodian and the 5498 form from the accepting custodian have different numbers due to the conversion amount and taxes withheld if any. Assuming that the conversion was completely non-taxable (i.e. your Traditional IRA was 100% basis), then the converted money can be taken out at any time whatsoever (no 5 year or age stuff), without tax or penalty, similar to directly contributed money. For withdrawing conversions and rollovers within 5 years of the conversion or rollover, the penalty only applies to the part of the conversion or rollover that was taxable. Since in this case the conversion was completely non-taxable, there is no penalty on the withdrawal. However, note that the ordering of the conversion money is not the same as for contribution money, and this may be significant in some cases. When you take money out of Roth IRA, it goes 1) contributions, 2) rollovers and conversions, and 3) earnings. However, money within (2) is then further divided by year, with rollovers and contributions for earlier years ordered before rollovers and contributions for later years, and then within each year, the taxable rollover and conversion money are ordered first, before the non-taxable money. So what does that mean? Well, suppose you made a Roth IRA conversion that was taxable one year, and then the next year you make a contribution. If you withdraw a little bit, it comes from the contribution which is ordered first, which means no penalty. Now suppose in that second year you had a backdoor Roth IRA contribution instead of a regular contribution. If you withdraw, the first year's conversion is ordered first, and since it's within 5 years, there's a penalty. It's still true that withdrawing the backdoor Roth IRA has no penalty; but, you don't get to that money until you finish the other one. If you've never made a taxable conversion before, then this issue doesn't exist. "No. A deposit to an IRA must be in cash. A conversion from traditional IRA to Roth can be ""in kind"" i.e. As a stock transfer. Last, any withdrawals can also be in stock or funds.  IRS Publication 590, so important, it's now in 2 sections Part A and Part B, addresses IRA issues such as this as well as most others.  By the way - now on page 7 - ""Contributions, except for rollover contributions, must be in cash.""" tl;dr: Please please please do the conversion first. JoeTaxpayer's answer is correct, but I am of the opposite opinion. First, there's just about no reason to have post-tax dollars in a Traditional IRA.  You'll eventually have to pay tax on the earnings those dollars generate, so it's essentially the same as having that money in a regular taxable account.  Meanwhile, if you roll those dollars into a Roth IRA, you get to earn tax-free money on them for the rest of your life (and even after your death)! Second, even if you did have some reason for keeping those post-tax dollars where they are, the last thing you ever want to do is mix them with pre-tax dollars (from, say, your 401k).  As soon as you mix them, all the dollars become subject to pro-rata taxation (as Joe mentioned), so any future decision you were planning to make about what to do with just your post-tax dollars is moot -- you have given away your right to think separately about your pre- and post-tax dollars. As an example, let's say the accounts you want to combine look like this: In the future you decide you want to move $2,000 from the above account into a Roth.  Because you mixed the money, the IRS insists that your rollover consists of: So now you owe tax (and it's regular income tax, I believe, not even capital gains tax) on $1,500.  That was money that you socked away specifically to avoid taxes, and now you've gone and paid taxes on it!  Now, there are valid arguments for intentionally moving pre-tax dollars from a Traditional to a Roth like this, but the point is that you shouldn't even have to be having that argument -- you have post-tax dollars in your Traditional IRA that almost certainly belong in a Roth.  By mixing your 401k into your Traditional IRA, you can no longer do anything with just the post-tax dollars.  The IRS will forever insist that you do these pro-rated calculations. Say in the future you suddenly realize that a Roth is much better for your financial situation than a Traditional IRA.  (Or you might still prefer a Traditional IRA, but as explained in the next sentence it's not available to you.)  Unfortunately, because you're covered by a (new) 401k -- or maybe because you earn too much money to contribute pre-tax dollars to either a Traditional or Roth IRA -- you're out of luck.  You're simply not allowed to contribute to a Roth. Most people in this situation can make use of what's called a back-door Roth.  They contribute up to the maximum amount per year ($5,500 or whatever it is now) post-tax to a Traditional IRA and then immediately roll it over to their Roth.  You can still try this, but guess what?  Yep, because you're mixing these new post-tax dollars with pre-tax money in your Traditional IRA, every year your rollover will be tainted with that pre-tax money, diluting the whole point of the back-door Roth.  You'll be paying taxes on money you never wanted to pay taxes on, and you'll be leaving post-tax money behind in your traditional IRA. (If it sounds like I'm annoyed about this situation from personal experience, it's because I am. :) By doing the conversion first, you never mix pre- and post-tax money, and your money goes where you want it. Of course, assuming you eventually do roll over your 401(k) into a Traditional IRA, the Really Annoying Consequence above will still plague you, but at least you'll have cleanly converted that first post-tax amount. I can only answer about the U.S. For question 2, I believe the answer is no. If you are a non-resident alien for tax purposes, then only income connected to the U.S. is reported as income on the tax return. Unless there were any non-deductible contributions to your pre-tax IRAs, when you convert to Roth IRA, the entire amount of the conversion is added to your income. So the tax consequence is the same as if you had that much additional U.S. income. If you are a non-resident alien with no other income in the U.S., then the income you have to report on your U.S. tax return will basically consist of the conversion. Non-resident aliens do not have a standard deduction. However, all people have a personal exemption. If we take 2013 as an example, the exemption is $3900 per person. We will assume that you will file as single or married filing separately (non-resident aliens cannot file as married filing jointly). The first $3900 of income is covered by the exemption, and is not counted in taxable income. For single and MFS, the next $8925 of income is taxed at 10%, then next $27325 of income is taxed at 15%, and so on. So if you convert less than the personal exemption amount every year ($3900 in 2013), then in theory you do not pay any taxes. If you convert a little bit more, then some of the conversion will be taxed at 10%, etc.