Table 3. Keeping Assets in a Non-Deductible IRA vs. Converting to a Roth IRA
Current Age Amount Transferred to New Roth IRA Federal/State Inc Taxes Due Pre-Tax Value at Retirement Total After-Tax
Withdrawals in
Retirement
Net Gain for Roth IRA in Total After-Tax Withdrawals
Deductible IRA Roth IRA Deductible IRA Roth IRA
45 $25,000 $4,313 $116,524 $116,524 $173,100 $239,585  
Tax Savings Account** 16,520 N/A 29,187 N/A  
Total Value 133,044 116,524 202,287 239,585 $37,298
 
55 $50,000 $8,625 $107,946 $107,946 $162,930 $221,948  
Tax Savings Account** 16,881 N/A 30,166 N/A  
Total Value 124,827 107,946 193,096 221,948 $28,852
The assumptions are the same as for Table 1, but since this is a non-deductible IRA, it assumes all IRA contributions were not deductible and, therefore, only earnings are subject to tax. The federal/state income taxes due for the non-deductible IRA assumed that the basis in the IRA at the time of conversion was $10,000 for the 45-year-old and $20,000 for the 55-year-old. It also assumes no taxes are paid from the non-deductible IRA, so the full amount in the IRA is converted to the Roth.

*The "tax savings" account assumes that the taxes that would have been paid in the IRA conversion are instead invested in a separate taxable account growing at the same rates noted above. The "tax savings" for the 45-year-old is $4,313 and $8,625 for the 55-year-old. The value of this separate account is added to the current non-deductible IRA to make a valid comparison with the Roth IRA, since we assumed that no money was taken out of the non-deductible IRA to pay taxes due as a result of converting to the Roth IRA.

Source: T. Rowe Price Associates, Inc.