Roth IRA Conversion - The effects of taxation on this decision.
ESPlanner's March 12, 2009 article entitled "Convert your IRA to a Roth!" presents a compelling case for converting a regular IRA to a Roth IRA. However, it appears that the significant effects of taxation have been left out of the calculations.
There is a considerable tax bill due on the amount converted - up to 30% or more depending on one's tax bracket. This money has to come from somewhere, cash on hand if available, or from selling other investments which will in turn have other tax consequences.
In the case study that accompanies the article the fictitious couple, Tom and Janet, obviously don't have the cash on hand (they still have a mortgage balance of 80K) so where does the tax money come from? From Tom's 401(k) or from the proceeds of the IRA sale? Wherever it comes from it will significantly alter the calculations toward not doing the conversion.
I would love to have a clear explanation of how to perform this calculation and include the tax effects.