Jan 07 2010

2010: The year of the ROTH.

This is a friendly reminder for anyone with retirement savings who is concerned about paying higher taxes in retirement: new tax rules remove earnings limits on Roth IRAs.

Prior to the start of 2010, you could not open a Roth IRA if:

  • Your individual adjusted gross income was $120,000 or more
  • You and your spouse’s adjusted gross income was $176,000 or more
  • You are a married taxpayer who filed separate returns from your spouse

But all of that changed on January 1, 2010. Those limitations have been permanently removed.

This opens the doors to millions of IRA and 401(k) account holders to convert those accounts to a Roth.

Reasons to convert.

Taxes.

Unlike IRA and 401(k) contributions (which are pre-tax), Roth IRA contributions are after tax. But withdrawals from Roth IRAs are tax-free, where IRA and 401(k) withdrawals are taxed at your income tax rate.

Required distributions.

There are none!

You can keep your savings in a Roth IRA as long as you want – and even leave them to your heirs upon your death.

Benefits for heirs.

If you leave your Roth IRA to your children, they don’t pay taxes on that money either!

You may be on the fence about whether to fund a Roth or traditional IRA, but here are two things to consider.

  • First, if you’ve been smart with your money, and invested well you will likely be withdrawing more money than you think you will in retirement. This is especially true if your savings are in an IRA or 401(k) or similar plan that requires mandatory distributions after a certain age.
  • Secondly, taxes will most certainly be higher in the future than they are today. Even before the current crop of politicians in D.C. quadrupled the deficit, tax cuts were set to expire and rates to return to higher levels. The recent spate of uncontrolled spending in Washington only sets the stage for even higher taxes down the road.

Source


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