Making sense of all the IRA Options

The Roth IRA was created in 1997 and allows people to save for retirement using post-tax funds. The

single, best benefit of the Roth is that it creates a tax shelter on any earnings you get on your funds

once deposited. There is no tax later on, even if you earn a 50% or 100% return on your monies.

For deposits, the Roth IRA does have a limitation on who can participate. If your adjusted gross income

exceeds the specific limit in a year, you are not allowed to use a Roth. Your only choice then is a

Traditional IRA. Married filing jointly have a cap phasing between $166,000 and 176,000 in income.

Single filers reach the ceiling much more quickly with adjusted gross income capped between $105,000

and $120,000.

However, this year’s new laws do help those high income-earners with existing Traditional IRAs by

allowing them to convert into a Roth Account, regardless of their income. So while you can’t add to the

account, you can at least convert over your existing Traditional accounts now rather than waiting for

when you earn less.

Why would anyone convert? Well, let’s go

back to the assumption about tax brackets.

Again, the traditional view was that the

average person will earn less in retirement

than during their career. So taxes would be

less when you got older and stopped

working. However, this model fell apart with

modern economics. The fact is many folks

have finished one career and picked up

another after retiring. In addition, many are

working two or maybe three jobs for a

variety of reasons. Add in a pension and

social security, and the net result is a higher

tax bracket then when they were working

their first job and saving. Now withdrawing

from a Traditional IRA will cost more in taxes

than it would have early on.

Not only does a conversion make sense with paying taxes now for many who continue to work, the 2010

laws also allow you to spread the tax pain.

Conversions of IRA accounts are allowed to spread the tax hit over two tax years or you can pay it all

now on your 2010 income tax filing.