Posted on Sun, Nov. 8, 2009
New rules for Individual Retirement Accounts should induce you to see if 2010 is the year to convert any traditional IRA into a Roth IRA. It depends on when you'd rather pay the taxes.
Making "cents." The Good Financial Cents site by financial planner Jeff Rose explains what's happening. There are two basic issues. First, in 2010, even high-income earners can convert an old IRA, on which you'll pay taxes after retirement, to a Roth IRA, on which you pay taxes now, and snub your nose at the Internal Revenue Service after you retire. Second, anyone who converts funds from a standard IRA to a Roth IRA next year can spread the resulting tax charge over two years to soften the blow.
http://go.philly.com/rothira1
Pros and cons. This Charles Schwab Web page, "Look before you leap," provides some points to consider in advance of deciding whether to convert existing funds to a Roth IRA. Schwab says converting to a Roth IRA makes sense in certain circumstances. Specifically: "You think you will be in the same or a higher tax bracket when you withdraw, have a long time horizon, and can pay the tax from sources other than your IRA."
http://go.philly.com/rothira2
IRS details. For the Internal Revenue Service's current rules covering Roth IRAs and how to account for contributions, conversions and withdrawals, see this page at the IRS.gov site. One interesting thing about Roth IRAs is that there's no requirement to begin making withdrawals at a certain age - traditional IRAs require withdrawals to begin by age 701/2. The upshot is that you can leave the whole tax-free wad to your heirs.
http://go.philly.com/rothira3
Calculate this. Online calculators can help you decide if a conversion to a Roth IRA is a good idea. You have to make what might be wild guesses about the interest rate you expect to earn on your retirement account and what tax bracket you'll be in when you reach retirement age. But at least you can get a feel for the factors involved, and make a somewhat educated decision.
http://www.calcxml.com/do/qua04
Contact staff writer Reid Kanaley at 215-854-5114 or rkanaley@phillynews.com.
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