Yuki (age 35 at year-end) has been contributing to a traditional IRA for years (all deductible contributions), and her IRA is now worth $50,000. She is trying to decide whether she should convert her traditional IRA into a Roth IRA. Her current marginal tax rate is 22 percent. She plans to withdraw the entire balance of the account in 30 years, and she expects to earn a before-tax rate of return of 8 percent on her retirement accounts and a 6 percent after-tax rate of return on all investments outside of her retirement accounts. For each of the following alternative scenarios, indicate how much more or less Yuki will accumulate after taxes in 20 years if she converts her traditional IRA into a Roth IRA. Be sure to include the opportunity cost of having to pay taxes on the conversion (Because she pays taxes with funds that are outside her retirement accounts, she will miss the opportunity of generating a 6% after-tax rate of return on the tax paid for 20 years).
a. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 35 percent.
b. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 12 percent.
