Roth Conversions: Why the Opportunity Cost Argument is Invalid
Some people believe there is a lost opportunity cost by doing a Roth conversion—that the funds used to pay the conversion tax could have been otherwise invested, and that investment return opportunity is lost.
False: It’s all about the tax rates
There is NO opportunity cost in terms of lost investment gains if the tax rates are the same both at conversion and later at distribution. Let’s look at the math:
ROTH CONVERSION
$100,000 Traditional IRA Balance
X 2 (Doubles in value over lifetime)
= $200,000
- $60,000 (30% tax)
$140,000 net
WITH ROTH CONVERSION
$100,000 Traditional IRA Balance
- $30,000 (30% tax)
= $70,000
x 2 (Doubles in value over lifetime)
$140,000 net
Whether taxes are paid now or later, it is the same net return, but half the amount of taxes are paid in the Roth conversion...That is if tax rates stay the same historic low rates they are today throughout your lifetime.