A taxpayer, age 45, is in the 24% tax bracket in Year 1 but expects to be in the 37% bracket during retirement. They have $100,000 in a Traditional IRA. They have outside cash to pay any taxes due. Which action maximizes after-tax wealth?

Q: What mistakes do candidates make on this CPA question?

Ignoring the source of funds for paying the tax liability.

Answer options:

Convert to Roth IRA in Year 1.

Keep funds in Traditional IRA.

Withdraw funds now and invest in taxable brokerage.

Convert to Roth IRA but pay taxes from the IRA funds.

How to approach this question

Compare current tax rate vs. future tax rate. If Current < Future, pay tax now (Roth Conversion). Paying tax from outside funds is crucial to maximize the tax-advantaged principal.

Full Answer

A.Convert to Roth IRA in Year 1.✓ Correct

Since the current rate (24%) is lower than the expected future rate (37%), paying taxes now via a Roth conversion is advantageous. Using outside funds to pay the tax preserves the full $100,000 in the tax-free Roth wrapper.

Common mistakes

Ignoring the source of funds for paying the tax liability.

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