An Analysis of Nondeductible Ira Contributions and Roth Ira Conversions

Posted: 16 Jun 1998

See all articles by Stephen Horan

Stephen Horan

CFP Board of Standards; University of North Carolina Wilmington

Jeffery H. Peterson

Saint Bonaventure University

Robert W. McLeod

University of Alabama


On average investors have an income replacement rate of 64 percent of their pre-retirement income, which in many cases results in a lower tax rate in retirement. We analyze the impact of declining withdrawal tax rates on the choice between taxable mutual fund investments and nondeductible IRAs. The relative attractiveness of the taxable mutual fund option declines significantly when withdrawal tax rates decline. Converting existing IRAs to Roth IRAs is generally beneficial for investors who remain in the same tax bracket upon withdrawal. For short (long) time horizons and low (high) expected returns, the marginal value of conversion in 1998 is greater (less) than the marginal value of optimal conversion. For investors dropping into the 15 percent tax bracket, conversion is generally not beneficial unless the conversion is done optimally, the time horizon is long, and the expected return is high. Investors in the 15 percent tax bracket should convert existing IRA assets.

JEL Classification: G11

Suggested Citation

Horan, Stephen and Peterson, Jeffery and McLeod, Robert W., An Analysis of Nondeductible Ira Contributions and Roth Ira Conversions. Available at SSRN:

Stephen Horan (Contact Author)

CFP Board of Standards ( email )

1425 K Street NW #800
Washington, DC 20005
United States

University of North Carolina Wilmington ( email )

601 South College Road
Wilmington, NC 28403
United States
4342272281 (Phone)
28405 (Fax)

Jeffery Peterson

Saint Bonaventure University ( email )

Saint Bonaventure, NY 14778
United States
716-375-2082 (Phone)

Robert W. McLeod

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8993 (Phone)
205-348-0590 (Fax)

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