No. of Recommendations: 3
Does this make sense to y'all?
No.
Multiplication is commutative. It does not matter what order you pay the tax.
Assuming the investment doubles in the 10 year period.
B is the initial $10,000 in the IRA
T = (1.0 - tax rate) = (1.0 - 0.24) (What you have left after tax)
Do not convert, pay tax at end.
case 1: (B * 2) * T
Convert, pay tax from the IRA.
Case 2: (B * T) * 2
These are exactly the same.
Consider the cases where you use outside funds to pay the tax.
The math is the same for what the outside fund money does, just replace B (the converted amount) with C (the amount of outside funds earmarked for the tax).
Now your total is greater by the OF contribution, but the two cases still have the same value.
case 1: ((B+C) * 2) * T
Case 2: ((B+C) * T) * 2
The error that people do is they take into account the OF in case 2, but ignore it in case 1.
Of course case 2 will be larger!
You are comparing A+C with A, and A+C will always be larger.
