Choice as to whether to convert from a deductible IRA into a Roth IRA when the taxpayer expects his future tax rate to decline depends on the relative magnitude of the taxpayer?s current and future tax rates t ₀ and t _n , the holding period n , and the pretax rate of return expected R to be earned on plan assets.

(Note also that Equation 3.9 assumes that any taxes due on conversion are paid in the conversion year from nonconverted funds that would otherwise be invested in an SPDA.)

Assume V = $50,000 and t ₀ = .40. Complete the following spreadsheet, first assuming that R = 10%. Then repeat the spreadsheet for R = 5% and R = 15%.

Interpret the results of your analysis. How does the conversion decision vary as a function of the pretax rate of return, holding period, and relative magnitudes of tax rates?

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Holding period n t 5 = .40 5 years 10 years 20 years 30 years tn 5=.35 tn 5=.30 tn 5= 25 Holding period n t 5 = .40 5 years 10 years 20 years 30 years tn 5=.35 tn 5=.30 tn 5= 25

Answer rating: 100% (QA)

Holding period n t n 5 40 t n 5 35 t n 5 30 t n 5 25 5 years 4000 3500 3000 2500 10 years 80... View the full answer