Soon, the advantages of a Roth IRA will be available to more investors, including the wealthiest. Currently, only households with income under $100,000 can convert Traditional IRAs (as well as 401(k) and other retirement plan assets) to Roth IRAs. But in 2010, this opportunity will be available to all investors, no matter what their annual household income.
The advantages of a Roth IRA
Although contributions to a Roth IRA aren't tax-deductible, qualified withdrawals are normally income-tax free. In addition, there are no required minimum distributions during the Roth IRA owner's lifetime, and no age at which you must stop making contributions. A Roth IRA offers these benefits.
- The convenience - and peace of mind- of tax-free income in retirement.
- Protection from possible tax increases in the future.
- The ability to keep your money working tax-deferred -even well into your retirement years.
- The potential to build a bigger legacy for your heirs.
- Tax diversification and less exposure to changing tax laws if you choose to convert only some of your Traditional IRA assets.
Flexibility in paying the taxes
To help ease the tax burden of a Roth conversion, you can choose to pay all the tax in 2010 or to spread it out evenly over 2011 and 2012. This benefit is only available to investors who convert in 2010. You'll get the most benefit from tax-deferred growth if you can avoid funding the conversion taxes from your retirement assets.
Ability to "undo" a conversion
If you complete a Roth IRA conversion and then experience losses, or for an reason regret the conversion, you can recharacterize " the IRA back to a Traditional IRA at any time up until the due date of your tax return for the year in which you converted. If you file your taxes on time, you are granted an automatic extension to October 15 to complete a recharacterization.
Things to consider before you convert
- Contributions you make to a Roth IRA after you convert are not tax-deductible. Also, in order to make contributions, your adjusted gross income cannot exceed $12o,000 for an Individual or $176,000 for a married couple (as of 2009).
- You may not take qualified distributions from a Roth IRA within five years beginning January 1 of the year in which you make a contribution and you must attain age 59 1/2. If you do, you may be subject to a 10% penalty.
- If the market value of the Roth IRA declines after you convert, you will have paid taxes of the larger amount.