Thursday, November 12, 2009

Personal Finance: Time to get serious about Roth IRAs


For so many years, people have planned for retirement thinking that they would pay lower taxes than they paid while working. However, it’s no longer a sure thing.

Many people have saved money toward their retirement by putting it into tax deferred accounts. They will have to pay taxes on that money as they take withdrawals. Approximately 85 percent of Social Security benefits will be taxed for many of these tax deferred savers.

In 2001, the federal deficit was out of control and tax cuts were set by President Bush that are set to expire in 2010. This creates a chance that tax rates will be much higher than they were over the last decade.

Roth IRAs were created in 1997 tax legislation. Roth IRAs allow workers to put away money that could build tax-free for retirement. Contributions to Roth IRAs do not qualify for tax deductions, but the money that is withdrawn years later, in retirement, is not taxed. That is especially beneficial to younger savers whose accounts have many years to earn interest, dividends and gains that can compound over time. The law that created Roth IRAs also included provisions for allowing taxpayers to convert their existing tax-deferred IRAs into Roths.

But Roth IRAs have had their limits, too. Only taxpayers who earn less than $105,000 ($166,000 for joint filers) in 2009 can contribute the maximum amount ($5,000 per person, with a $1,000 additional catch up contribution for folks 50 or older) to a Roth IRA. And only people earning less than $100,000, single or married filing jointly, can convert their traditional IRAs to Roths.

In 2010, some of those rules will change. That $100,000 limit disappears, so folks with higher incomes can convert traditional IRAs to Roth IRAs. Deciding whether to do that, and how to go about it, is going to be difficult and complex. Here are some considerations.

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Posted By: Amy Nightingale

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