Tax Talk

To Roth Or Not To Roth

By Candace Bahr, CEA, CDFA and Ginita Wall, CPA®, CFP

To Roth or not to Roth, that is the question. At least, that is the question on many people's minds this year. Beginning in 2010, Uncle Sam lifted the income limits on Roth IRA conversions. Here are the answers to some of the questions you've been asking about the Roth IRAs.

Why are Roth IRAs a good deal, if they aren't tax deductible?

The only things better than tax-deductible contributions are tax-free withdrawals, and that is the whole point of the Roth. The tax-free amounts you eventually draw out will far exceed your non-deductible contributions, so the Roth will save income taxes for almost everyone who is fifteen years or more from needing their retirement savings.

When is the best time to convert a regular IRA to a Roth IRA?

If you have several years until retirement, and you have the money outside your retirement accounts to pay the tax, this is a great opportunity to pay taxes on a lower amount now and reap tax-free benefits later. Because of a special rule, those who convert accounts in 2010 can spread the taxes over 2011 and 2012 instead of paying it all at once.

Remember that dip in the stock market in 2008? Well, now it can work to your benefit, because a depressed IRA means paying less in income taxes when you convert to a Roth. If divorce dealt you a double-whammy, with your IRAs having been cut in half in divorce and reduced even further by stock market losses, this is good news,

If I don’t convert to a Roth IRA, should I still consider making annual contributions to a Roth IRA?

If your money has years to grow before you’ll need it in retirement, contributing to a Roth IRA is a golden opportunity. Even though you won’t get the tax deduction now, the prospect of tax-free income in retirement should make up for it in spades over the years. But be sure that your income is not too high to qualify To make a full contribution in 2010, your income must be less than $105,000 if you’re single, or less than $166,000 if you’re married and filing a joint return.

At WIFE we welcome your comments. Please feel free to contact us.

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