2010 Roth IRA Opportunities

A Roth IRA allows you to save tax deferred money like a regular IRA, and withdraw money tax free. The catch is that instead of paying taxes when you are retired and withdrawing money, you pay tax before you make your contribution.

Besides tax free withdrawals, one of the best features of a Roth IRA is that there is NO required minimum distribution (RMD) at age 70 ½. This works great for extending the life of your nest egg, which is crucial in down years like 2008, when many IRA owners age 70 ½ would rather let their portfolios recover. Lower IRA values after the 2008 recession is partially why Congress passed a law allowing retirees to skip their required minimum distribution last year.

Because of the benefits, Congress limits those who can have a Roth IRA. If your Modified Adjusted Gross Income (MAGI) is above $120,000 (single) or $176,000 (married), under most circumstances, you cannot benefit from a Roth. If your MAGI is below these figures you can make up to a $5,000 contribution to a Roth in 2010 ($6,000 if you are over age 50).

When does a Roth make sense?

1.    You don’t want to be forced to take required minimum distributions at 70 ½.
2.    You will be in a higher tax bracket during retirement
3.    You think tax rates will increase

There are other times a Roth IRA makes sense, but these are a few of the main reasons. Some other questions you may have are:

  • · If I make 401k contributions, can I still make Roth contributions? Yes. You can make Roth IRA AND 401k contributions as long as your MAGI is below the limits discussed above.
  • · How can I get a Roth IRA if my MAGI is too high? In 2010 Congress is giving us a gift. They are allowing anyone with an IRA, regardless of income, to convert to a Roth IRAs. The catch is that you have to pay ordinary income tax on the converted money. Fortunately, the provisions in the law allows you to spread the tax due over your 2011 and 2012 tax bill. For some this may allow you to stay in the same tax bracket, assuming tax brackets aren’t raised.

Example: Jean has $100,000 in her IRA. She is in the 25% tax bracket, but expects to be in the 28% bracket when she retires in 10 years. She is planning on being retired for 30 years. My analysis shows that if she converts now, she’ll owe $25,000 in taxes, but will increase her total value of after tax distributions by $83,622.

This is an overly simplistic example, but it illustrates the point that Roth IRAs can save you money on tax in the long run depending on your situation. You may even be able to convert 401ks or 403bs with past employers to Roth IRAs as long as they are rolled into a traditional IRA and converted to a Roth before the end of the year. Also remember that this analysis is based on variables that may change over time. There is no guarantee you will benefit.

In summary, Roth IRAs are retirement accounts where you pay no income tax on withdrawals. This year, investors who were previously unable to get access to Roth IRAs, have the ability to convert their current IRA to a Roth regardless of income.

About the author

Richard T. Feight, CFP®
Richard T. Feight, CFP®

Among independent financial advisors, Mr. Feight is one of the most well known and highly respected “Fee-Only” financial planners. Since 1997, Rich has dedicated his career to offering low cost “Fee-Only” comprehensive financial planning and investment advice. Rich assists his clients in organizing their finances so that they can retire on time.Rich is a graduate of Michigan State University where he received his degree in Finance. Rich has earned the Certificate of Financial Planning from The College for Financial Planning in Denver , Colorado that was comprised of intense graduate level classes grounding him in the various foundations of financial planning. He is a CFP® (Certified Financial Planner®) since 2001, meeting the experience, education requirements and passing the two-day, 10 hour exam, making him one of the few in the country who hold the designation. Since 2003, Rich has subscribed to the stringent and mandatory annual educational hours, experience, and code of ethics to meet the requirements to be a NAPFA Registered Financial Advisor. Out of the 800,000 individuals in the country who claim they are financial advisors/planners, fewer than 1,300 in the country qualify for the membership; Rich is one of them.

Rich is the President of the Financial Planning Association (FPA) of Michigan . The FPA of Michigan is one of largest and influential chapter in the country. Rich was recently named President for Transportation Toastmasters Club 4776 downtown Lansing . He has been quoted in both local and national media from Noise Magazine to CNBC, and Bloomberg, and industry news publications such as Investment News and Financial Advisor Magazine. Rich enjoys public speaking and has spoke at industry educational meeting, high schools, and executive investment clubs, AARP conferences, and business educational seminars for companies looking to educate their employees. Rich views his role as a Fiduciary for his clients as the single biggest key to any planning relationship and strives to provide the most competent, unbiased and objective advice in the financial planning profession today.

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