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Retirement Investments: Should You Convert?

Barbara Marquand | guest writer for GoTalkMoney

The 2010 Roth IRA Opportunity

Previously off-limits to high earners, the Roth IRA will be available to anyone as a retirements savings vehicle starting in 2010. It's not too soon to start thinking it over because there is no single right answer for everybody. The solution will depend on your circumstances, and there are several factors to consider.

Roth IRA Best Way for Some to Grow Investments

Created by federal law in 1997, the Roth IRA has offered appealing advantages to investors, mostly young people who were years away from their peak earning potential. 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. Check our listings here for money market account rates. The best 7-year CD rates can be found right here on our site.

Unlike traditional IRAs, contributions are made after taxes, but distributions and earnings are tax free. The Roth IRA also allows penalty-free withdrawals of contributions. After five years, up to $10,000 can be withdrawn for the purchase of a first home. Money in the account can also be used to pay for children's college education.

New Rules: Higher Earning Investors Can Put Their Money Market, CDs, and Other Savings in Roth IRAs

In 2009, individuals with modified gross adjusted incomes (MAGI) under $105,000 and married couples filing jointly with MAGI under $166,000 can contribute up to $5,000 to a Roth IRA. Taxpayers 50 and older can contribute an additional $1,000.The contributions phase out for individuals earning between $105,000 and $120,000 and for maried couples filing jointly with MAGI between $166,000 and $176,000. Taxpayers earning above the top limits are shut out from the Roth IRA. And anyone earning above $100,000 can't covert a traditional IRA to a Roth. New laws next year, however,remove income limits on Roth IRAs and Roth IRA conversions.

So Should You Convert Your Traditional IRA Savings to a Roth Next Year? Consider the Following:

• Keep in mind you'll owe taxes on the money you convert because contributions to a Roth IRA are made after taxes, and the contributions to your traditional IRA were made before taxes.

• If you want to convert, make sure you can pay the tax bill for the conversion with money other than from your IRA. Using your IRA to pay the tax would defeat any advantages of the conversion.

• If you convert next year, you can spread the tax bill for the conversion over two years--2011 and 2012. But if you convert after 2010, you'll have to pay the taxes all in one year.

• Consider a Roth IRA if you want more flexibility in the amount distributed after retirement. Unlike traditional IRAs, the Roth IRA has no minimum distribution level starting at age 70 1/2. That means you don't have to take out more than you need, and you can leave more money in your account for your beneficiaries to collect tax-free after your death. As a key benefit for estate planning this alone might outweigh other considerations.

• You can withdraw earnings tax free from a Roth IRA if you're 59 1/2 and you've had the account at least five years. Before 59 1/2, you'll pay a penalty for withdrawing earnings, although you can withdraw contributions without penalty.

What Financial Planners Say About Your Savings

Compare your tax bracket now to what you think it might be after retirement. Financial planners use this rule of thumb: Consider the Roth IRA if you have many years to go before retirement and you think you'll be in a higher tax bracket when you're eligible for distributions. Think about sticking with a traditional IRA, which offers the upfront tax deductions, if you think you'll be in a lower tax bracket when you're getting distributions.


Source:

- Randy Spiegelman, CPA, CFP • 2010 Roth Conversion: Look Before You Leap • Jul 22, 2009 • http://www.schwab.comhttp://www.schwab.com/public/schwab/research_strategies/market_insight/retirement_strategies/planning/2010_roth_conversion_look_before_you_leap.html • Charles Schwab's Web site

- Denise Applebee,CISP, CRC, CRPS, CRSP, APA • Roth IRA: Back to Basics • 0000-00-00 • http://www.investopedia.comhttp://www.investopedia.com/articles/retirement/04/091504.asp • A Forbes digital company

- Erin Burt • Why You Need a Roth IRA • Mar 19, 2009 • http://www.kiplinger.comhttp://www.kiplinger.com/columns/starting/archive/2006/st0309.htm?kipad_id=49

- Federal Government • IRA Online Resource Guide • Mar 04, 2009 • http://www.irs.govhttp://www.irs.gov/retirement/article/0,,id=137307,00.html

Federal government • Publication 590 Individual Retirement Arrangements • Jan 30, 2009 • http://www.irs.govhttp://www.irs.gov/pub/irs-pdf/p590.pdf

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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