How long will the Roth IRA compound?
Since it costs money to convert, you need time for the Roth IRA’s returns to compound and eventually make up for the early tax bill. My research over the years has shown a converted IRA needs at least seven years of compounding at an 8% annual return to make up for the taxes. It takes longer at a lower rate of return. The minimum compounding also period depends on some of the other assumptions we review. Where will the taxes come from? The taxes should be paid from non-IRA funds in most cases. If you don’t have enough outside the IRA to pay the taxes, you probably shouldn’t convert. If you use IRA funds to pay the taxes, you have to take an additional distribution from the IRA to pay the taxes, and if you are under age 59½ will owe the 10% early distribution penalty on that amount in addition to income taxes. (Converted amounts are not subject to the 10% penalty.) An IRA does not have to be converted at once. If you don’t have enough cash to pay the taxes, you can convert part of the I
