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6 Factors in Favor of Converting to a Roth IRA

This year you can convert a traditional IRA or a 401(k) from a former employer to a Roth IRA, even if you make big bucks. Previously reserved for taxpayers who make less than $100,000 a year, conversions to Roth IRAs are open to everybody now, thanks to a lifting of income restrictions.

Conversion is not the right move for everybody. Typically Roth IRAs are good for people in their early earning years, who have a long way to go before retirement. Yet conversion still might be a consideration, even if you're well into your career. Here are 6 reasons conversion might make sense in 2010.

1. Tax Payment Spread

You face a tax bill when you convert a traditional IRA to a Roth because of the way the two types of accounts are structured. Traditional IRAs let you claim tax deductions for the money you sock away in the account. You pay taxes on the contributions and earnings upon withdrawal in retirement. You don't get a tax deduction on contributions you make to a Roth. Instead, those after-tax contributions are allowed to grow tax free, and you pay no taxes when you withdraw in retirement.

The IRS lets you spread the tax bill for a conversion this year over 2011 and 2012. For any conversions after 2010, though, you must pay the taxes owed all in one year.

2. The Tough Market

The stock market plunge two years ago thrashed retirement accounts, and many are still recovering. Now might be a good time to convert while your retirement account value is relatively low. You'll owe more taxes if you let the account grow before converting.

3. Your Future Tax Rates

In general financial planners say investors should consider the Roth IRA if they believe they'll pay higher tax rates once they're eligible for distributions. You could pay higher tax rates than now if you retire at a relatively young age and need to make hefty withdrawals to support an active lifestyle, for instance. In most cases you should probably stick with a traditional IRA if you think you'll be in a lower tax bracket when you're getting distributions.

4. Estate Planning Flexibility

Roth IRAs offer more distribution flexibility than traditional IRAs, a key benefit for estate planning. Traditional IRAs require minimum distributions starting at 70 1/2. You must take the money and pay taxes on it whether you need or it not. But Roth IRAs have no minimum distribution levels, so you only take out the money you need. This allows you to leave more money in your account for your beneficiaries to collect tax-free after your death.

5. Flexibility for Investments

Considering a conversion from a former employer's 401(k)? The Roth IRA offers more flexibility than a 401(k), allowing investments in just about anything--stocks, mutual funds, money market accounts, certificates of deposit, even real estate.

6. You Can Change Your Mind

Tax rules let you change your mind, called a "recharacterization," if you convert to a Roth and then decide you'd like to go back to a traditional IRA. You have until Oct. 15, 2011 to reverse a conversion made this year.

Only you and your financial advisers can decide whether conversion is a good idea. Get help from your accountant or the custodian of your IRA if you're confused.



Four Simple Ways to Protect Retirement Savings

With the stock market on a roller coaster, savings rates at paltry levels, and a debt crisis brewing overseas, the reins of your financial life may have been pulled from your hands.

Rather than fretting about things you can't control, focus on the things you can. Here are four simple steps to take:

Save Your Money: Avoid Bank Fees

Avoid conditions that spark bank fees. If you're paying a monthly maintenance fee on checking, investigate what you need to do to avoid the fee, such as maintaining a higher balance. Or find a free checking account at another institution.

Just say no to overdraft services touted by banks, and find a less-expensive alternative for overdraft protection, such as linking your checking to your savings account. Starting June 1, banks must get your permission to let you overdraw your bank account with your debit card and charge you a fee for the privilege. Those fees average about $30--money you could put to better use in lean times.

Compare CD Rates Online

Sure CD rates are miniscule, but that should give you even more incentive to get the best CD rates possible. With online tools its easier today than ever before to compare rates offered by multiple institutions. Check offerings at your local banks, and then compare them to those listed online.

Don't jump for higher rates without reading terms and conditions carefully. CDs come in a wider variety than they did a generation ago, and some are far more complex than you might expect. The notion that higher returns mean higher risk applies to CDs as much as it does to stock investments. Indexed CDs, for instance, which are tied to a market index like the S&P 500, promise higher potential returns than standard CDs, but they also come with longer terms, stiffer withdrawal penalties, and the chance of zero returns if the index tanks.

Earn Interest Where You Can

Consider a high-interest checking account. Yields sometimes beat those of savings accounts if you meet the account requirements. Typically, to earn the interest you must make a certain number of debit card purchases a month--usually 10 to 12--get all your statements by e-mail, and use direct deposit and automatic bill pay.

Meanwhile, how much interest are you making on your money market or savings account? Compare that to rates offered by online banks, which because of lower overhead, typically offer higher yields than traditional banks. The accounts are easy to set up and usually require no minimum balance.

Ensure Investments Safety: Check FDIC Insurance Coverage

Let the woeful tale of former IndyMac Bank customers remind you to make sure your bank deposits are within FDIC limits, now $250,000 per depositor per institution through 2013. Some 8,000 customers were caught underinsured when IndyMac failed in July 2008. Remember, that was when bank failures were a rarit, not a weekly event. At the time, the FDIC insurance limit was $100,000. Three months later, Congress raised the limit to $250,000, but the action came too late for IndyMac customers. An FDIC-backed House bill is pending that would extend the higher level retroactively to banks that failed after Jan. 1, 2008, including IndyMac and five others. Still, even the higher limit won't help some customers, who reportedly lost as much as $1 million. They say bank representatives assured them they were fully insured because of the way the accounts were set up.

Bear in mind the insurance level will drop to $100,000 in 2014, a key consideration when you purchase long-term CDs that will expire after the lower limit is in effect.

As the economy continues its slow crawl to recovery, minding the financial details you can control will ensure the best possible future for you and your family.



Rising-Rate CDs: Are They Right for You?

With today's miniscule savings rates, you might find yourself waiting on the CD sidelines for rates to go up.

High unemployment, low inflation, a fragile housing market, and the European debt crisis are keeping interest rates low for now, but everybody knows rates will go up at some point, and no one wants a lot of cash locked up in low-rate CDs when the inevitable finally happens.

"Rising rate" or "bump-up" CDs are one answer to the dilemma. Although touted as new, these products have been around since the 1980s after deregulation removed many of the old structures dictating the types of CDs banks could offer.

Today, with interest rates in the basement, rising rate CDs are gaining attention again, and a number of banks have unrolled new products recently.

Certificate of Deposit with a Twist

Bank of America's 18-month Opt-Up CD gives you the option to increase your CD rate one time after six months, if interest rates rise during the term. Opting up to a higher rate doesn't increase the term length or carry any additional fees. The minimum deposit amount is $10,000, and the APR as of May 28 was 1%

Ally Bank's 2-year Raise Your Rate CD also gives you the chance to raise your interest rate one time during the term if rates go up. The CD has no minimum deposit amount and no fees. The CD rate as of May 28 was 1.95%.

First Midwest bank introduced its 32-Month Rising Rate CD, which gives you a guaranteed interest rate increase every eight months. The minimum balance is $5,000 and the overall APR as of May 28 was 2%. The rate starts at 1.41%, and then bumps up a fraction of a percentage point every eight months until it reaches 2.41%.

Consider Starting CD Rates

Rising-rate CDs are worth a look, but they might not be the best deal for you. CDs that let you bump up the rate often offer lower starting APRs than conventional CDs. Compare the terms of different rising-rate CDs with one another as well as with plain CDs. Remember, you're not guaranteed the bank will raise its rates during a bump-up CD's term, and you might be better off locking in a higher starting rate and staying there.

Consider other certificate of deposit alternatives to maximize returns, and weigh the pros and cons of each. A 5-year CD will offer a better APR than an 18-month CD, for instance. Of course, with a longer term, you'll run a risk that interest rates will rise and your money will be locked in at a lower rate for a relatively long period of time.

Indexed CDs, which are tied to an index, such as the S&P 500, provide the potential for higher returns than conventional CDs, but they also come with greater risks. Indexed CDs tend to have longer terms, much harsher withdrawal penalties--you can lose principal, not just interest if you withdraw early--and they don't guarantee a return. If the index plummets, you still keep all the money you invested but you don't earn anything, which means you actually lose the potential yields you could have gained had you invested the money in a conventional, albeit low-yield CD.

Certificates of deposit are more complex than they were a generation ago, with more options available than ever before. Whether you choose a standard, rising-rate or indexed CD, read and understand all the terms and conditions before you buy.



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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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