Roth IRA

In January 2010, many investors who had previously been prevented from considering a Roth IRA conversion because of income limits will be able to consider converting to a Roth IRA.

Asset manager Charles Schwab recently published a useful list of tips that are worth considering in light of the Roth IRA conversion opportunities.

Much of the content naturally focuses on tax considerations and differences between traditional and Roth IRAs.

Source: Charles Schwab

The income limits on Roth IRAs will change in 2010.

Current restrictions on Roth IRAs are set at $105,000 for singles and $166,000 for couples.

Removal of these restrictions will open-up a much wider market for Roth IRAs.

Higher income earners will simply need to establish a conventional IRA and then convert to a Roth.  Taxes due on the conversion can be paid over the course of 2011 and 2012 rather than at once in 2010.

Source: Investment News

Income limits on Roth IRA conversions are set to go away in 2010.

This opens-up an opportunity for many to benefit from the tax advantages associated with the Roth IRA.

Conversion may also make sense as a hedge against the distinct possibility of tax increases and higher tax brackets for future retirees.

That said, the Roth IRA also happens to be an enormously efficient vehicle if there is a bequest motive or desire to pass assets to heirs:

A good article from Investment News on the use of calculators for Roth IRA conversion calculators.

Deciding whether to convert to a Roth IRA is fairly complex.  There are a number of variables that come into play such as tax rates, investment returns, inflation rates, etc.

Faulty assumptions for any one of the factors will produce faulty results and possibly poor decisions.

Free, web-based calculators are often less robust than those used by financial advisors.

Income limits that have prevented many people from converting from a traditional IRA to a Roth IRA will be eliminated on January 1, 2010.

With a traditional IRA, contributions and growth of capital are tax free, but distributions are taxed as normal income.

Roth IRAs differ in that contributions are taxable while growth of capital and distributions are tax free.  In addition, unlike traditional IRAs, there are no required minimum distributions with Roth IRAs.  Last, with a Roth IRA your heirs do not owe income tax on withdrawals.

An outstanding layout of a retirement planning timeline from Emily Brandon at U.S. News and World Report.

Key dates and ages are discussed for all manner of retirement planning milestones:

• 401k contributions and distributions.
• IRA contributions and distributions.
• Roth IRA contributions and distributions.
• Medicare.
• Social Security.
• Required minimum distributions.

Source: U.S. News and World Report

A great article on Roth IRAs and IRAs in Kiplinger's personal finance section.

Income limits, contribution limits, Roth IRA conversions and tax implications are all addressed.

Required minimum distributions and the waiver from Congress in 2009 are also discussed.

Source: Kiplinger

Full Story 

The financial crisis has taken a heavy toll on the personal finances of most people.  A natural reaction is to consider withdrawing funds from a tax advantaged saving plan such as a 401k or IRA.

The reality, though, is that funds from such sources can be extraordinarily expensive when all of the penalty fees and tax implications are taken into account.

The rules are complex and generally depend on a person's age and the type of plan involved.  Some high-level points to consider:

The IRA and Roth IRA contribution limits for 2009 remain at $5,000--the same as 2008.

Persons turning 50 years old this year are able to make a $6,000 contribution to either the traditional IRA or Roth IRA.

Phase-out ranges for Roth IRAs are changing in 2009.  Adjusted gross income levels determine whether persons are able to contribute to a Roth IRA. 

In 2009, contribution levels begin to decrease when adjusted gross income exceeds $105,000 for individuals and $166,000 for joint filers.

Both traditional individual retirement accounts (IRAs) and Roth IRAs are tax advantaged accounts.

With a traditional IRA, contributions to the account are tax deductible.  Appropriate distributions from the account are taxed in the future at income tax rates that apply to the account owner's future level of income.

Contributions to a Roth IRA are not tax deductible, but the future distributions are tax free.