To Roth Or Not to Roth? Best Idea For 2010

In our office, we hear every question imaginable about traditional IRAs and Roth IRAs. People serious about retirement income want to know how to make the most of their retirement accounts. Below are some of the most important questions. (observe. This is not a comprehensive list of questions.)

To Roth or Not to Roth


Breaking the Lock

Chances are, your retirement income is locked up in your Individual Retirement Account (IRA). If that’s right, you’re most likely going to take a big tax hit. Economists and financial experts agree that taxes will soon increase at record levels. Why? Because following the 2009 meltdown, the government needs to raise money. When taxes do go up, your traditional IRA will take a tax hit, and it could be meaningful. It could truly leave you with less than half of your money.

That’s the bad news. The good news is, the government has also given you one of the best tax breaks in history. It’s called a “Roth IRA.” While this is not right for everyone, for the right people, the benefits are simply amazing! Is it right for you?

Let’s look at a few facts:

Fact 1. As of January 1, 2010, the rules for opening a Roth IRA could make it far better for you than keeping all your retirement money in your existing IRA.

Fact 2. Traditional IRAs allow you to invest before taxes are paid. This is usually when your tax rate is at its highest. You get a tax deduction and tax-deferred growth. Then, you pay the taxes when you withdraw the money.

Fact 3. Your Traditional IRA requires you to begin making at the minimum a minimum withdrawal at age 70 1/2.

Fact 4. Roth IRAs are different. You pay the tax when you put the money into the account. consequently, you get tax-free growth, plus you owe no tax when you withdraw the money, and you are not required to make a minimum withdrawal.

Question. Is tax deductibility or tax-free income better for you? And, how do you know? Keep reading. We’ll explain below.

Q. What’s the big deal about a Roth IRA Conversion?

A. Tax Free Growth. In May of 2006 a $70-billion tax bill was signed into law. It changed the eligibility rules for Roth IRA conversions.

As of January 1, 2010 taxpayers with alternation modificated gross income of more than $100,000

are NOW allowed to transform a traditional IRA to a Roth.

This change applies to all years beyond 2010 – and the income taxes due on the 2010 conversion can be spread over two years. While it might sound like just details, that truly represents a terrific tax advantage!

Q. Is it possible to bypass the income restrictions?

A. Yes, it’s possible to legally bypass the income restrictions simply by making contributions to a traditional I.R.A. and then converting the I.R.A. contributions to a Roth I.R.A. You nevertheless pay tax on the taxable percentage converted, but you will have bypassed the income restrictions.

Q. How can I open a Roth IRA?

A. There are two ways to get money into a Roth I.R.A. One is to open a new Roth IRA, then make regular contributions. The other is to transform an existing IRA (or company plan) to a Roth IRA. But there are nevertheless income restrictions on who can contribute to a Roth I.R.A.

Q. What’s the down side of a Roth IRA?

A. They are based on money you’ve already paid taxes on, so if you transform a traditional IRA to a Roth IRA, you will have to pay tax on it. Please remember, IRS rules are complicated and confusing, and many financial advisors are not experts in this kind of account.


The following list gives you a Quick Reference to see some of the basic benefits of a Roth IRA. If the Roth sounds good, keep reading. It gets better.

• Tax-free growth.

• Taxes are paid before the money goes into the account.

• Contributions can be made at any age, and there is no mandatory withdrawal age.

• Self-directed – no minimum annual contribution and you choose your investment vehicles.

• Tax-free qualified distributions.

• Tax free income in retirement. Keeps taxable income low, already when taxes go up.

• No mandated minimum distributions.

• Conversions can be reversed up to October 15 of the year after the conversion.

• Funds pass income-tax free to beneficiaries.

• Beneficiaries can stretch tax-free distributions over their lifetimes.

• Roth IRAs remove the uncertainty of how future tax rates could impact your retirement money.

Are you eligible?

Q. If I open a Roth IRA, then see it’s not right for me, am I stuck with it?

A. Good news. You have until October 15, 2011 to change your mind and reverse any part of (or all of) a 2010 conversion.

Q. What’s the difference between pre-tax and after-tax, and which one is better?

A. Pre-tax method you put the money into your account before paying taxes. This gives you a tax-deduction and a tax-deferral. The problem is, the growth in a tax-deductible account is fully taxable, so you have to pay the tax when you take money out. Also, this kind account is unprotected to minimum dispensing rules. consequently, they offer only a minimal tax shelter and could be a disadvantage to your retirement income – especially if tax rates go up.

however, when you fund your retirement account with after-tax money (like a Roth IRA) many of those disadvantages disappear.

Q. How do I know if I qualify for a Roth IRA?

A. The only eligibility rule for contributing to a Roth IRA is that you have been paid some kind of compensation. This can be in the form of wages, salaries, tips, specialized fees, and already bonuses.

Before you make any decision affecting your retirement income, please talk with a specialized.

Q. Do all retirement accounts require me to withdraw a certain amount every year?

A. NO. That rule does not apply to Roth IRAs. According to the IRS, the required minimum dispensing rules apply to “traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.” They do not apply to a Roth IRA.

Q. Can my teen-age son open a Roth IRA?

A. Yes. Age is not a factor with a Roth IRA. As long as your son has earned an income, he can open a Roth IRA.

Q. I’m retired. Can I contribute part of my Social Security benefits to a Roth IRA?

A. Nope. Sorry.

To make a Roth IRA contribution, you must have earned income. That typically does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains. It can, however, include alimony.

Q. When I retire, can I take money from my Roth IRA without paying any taxes or penalties?

A. Maybe. Under the IRS rules, you are allowed to remove your original contributions at any time without tax or penalty. In addition, after you’ve waited at the minimum five tax years, you’re able to withdraw your original converted amounts without taxes or penalties.

It’s only when you get to the earnings generated by the original contributions and conversions that you could see a tax and/or penalty. As you can see, these rules get confusing.

Q. If I transform my IRA to a Roth IRA, will that increase my modificated gross income (AGI) for the current year?

A. Yes, indeed. The income you have to report for an IRA conversion to a Roth will affect all tax issues that are based on AGI. But, that does not include any direct Roth contribution and/or conversion issues.

Please observe. Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted. Please make sure to discuss your personal situation with a specialized. That’s why we are here.

Tax and financial rules are never simple. They are very complicated, and many advisors do not understand them.

Material discussed in this paper is meant to provide general information and should not be acted on without obtaining specialized advice appropriately tailored to your individual needs.

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