Is a Roth IRA for you?
For some taxpayers, this retirement account can be a potent wealth builder
Whether your retirement years are imminent or just a distant speck on the horizon, you probably know that individual retirement accounts (IRAs) can help you save for them. But are you up to speed on Roth IRAs? Less well-known than the traditional kind, these accounts have been around for years, but recent changes in the law have made them a more attractive tool for many savers.
To find out how Roth IRAs may fit into your retirement savings planning, Bergen Health & Life turned to Philip Goldstein, managing partner of the accounting firm Goldstein, Lieberman & Company LLC in Mahwah:
BERGEN HEALTH & LIFE : What is a Roth IRA ?
GOLDSTEIN: It’s a retirement account, established in 1997 and named for its legislative sponsor, the late Sen. William Roth (R-Del.), that with certain limits allows invested funds to grow tax-free.
How does it differ from a traditional IRA? Unlike a traditional IRA, a Roth IRA does not provide a deduction that reduces your taxable income as you make contributions. You put in funds you’ve paid taxes on. Then, in retirement, you can withdraw those funds tax-free.
What are the advantages of a Roth IRA? Unlike a traditional IRA, it doesn’t require a distribution—that is, taking the money out—at age 70½. If it turns out that you don’t need to withdraw all your funds during your retirement years, they can be passed on to heirs. And if a husband and wife both own Roth IRAs and one of them dies, the survivor can combine the two accounts without penalty.
Can anyone contribute to a Roth IRA? No, only those people whose adjusted gross income falls under certain thresholds. For your 2010 taxes, for example, a taxpayer’s ability to contribute was phased out for single taxpayers between $105,000 and $120,000 in adjustable gross income, and for married taxpayers filing jointly, the phaseout was from $167,000 to $177,000. But remember, that’s adjusted gross income—your income after deductions. So most people, even in relatively affluent Bergen, are eligible. But whether or not you can contribute in a given year, it’s worth asking your financial adviser about converting a traditional IRA into a Roth IRA. Starting with tax year 2010, the laws about such conversions changed to create a new opportunity.
How so? Until 2010, only taxpayers with an adjusted gross income of $100,000 or less were allowed to convert their traditional IRAs to Roth IRAs. Now that limit has been lifted and the option is open to everyone.
Why did the government make that change? When you convert, you pay taxes now. Presumably the government wanted to encourage that because it’s hurting so badly for cash now.
So who should consider such a conversion? In general, the wealthier you are and the younger you are, the more converting your traditional IRA to a Roth IRA makes sense to grow your family nest egg. If you haven’t saved enough—which unfortunately is the plight of many Baby Boomers— converting to a Roth IRA may not be wise. In any case, there’s a slight element of crystal ball-gazing required.
Why is that? We don’t know right now just how high taxes will be in the future when you’re retired. But if they go higher—and that certainly seems likely given today’s whopping deficits—you may be glad to have already paid taxes on the funds you’re saving. For many of us, a balanced approach—keeping some funds in a traditional IRA and some in a Roth IRA—may be the best idea. Consult with your financial adviser.
