Tips to Help Investors Decide Between Traditional and Roth IRAs
Individual Retirement Accounts (IRAs) are a great retirement savings tool for most individuals. They come in two types: Traditional and Roth.
Traditional IRAs are established with pretax dollars and you will pay income tax on the full amount when you withdraw the money. Roth IRAs (named after Senator William Roth of Delaware) are established with after tax dollars and your money will grow tax free. This means you will not pay income taxes when you take your money out of the account.
IRA conversions are a great opportunity for those who can benefit. What is an IRA conversion? The IRA conversion process is moving your money from a Traditional IRA to a Roth IRA. The downside is that you are required to pay income taxes on the converted dollars at conversion time, but your money will grow tax free.
Prior to 2010, there has been a $100,000 Adjusted Gross Income (AGI) limit. This meant that anyone, single or married, with AGI limit over $100,000 was not allowed to convert from a Traditional IRA to Roth IRA.
However, for calendar year 2010 only, the laws have been changed to allow anyone to convert a Traditional IRA to a Roth IRA.
Advantages to converting to a Roth IRA:
- Avoid Taxes in the Future: Roth IRAs grow tax free. Therefore there will not be any taxes owed when you decide to withdraw your money.
- No Required Minimum Distributions (RMD): Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.
- Lower Balances to Convert: Due to the recent market downturn, most people have lower balances which mean there will be less taxes paid on the conversion.
- Spread Taxes Over Two Years: The federal government is also allowing income tax due on your 2010 conversions to be split between 2011 and 2012.
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