Making
the Switch to a Roth IRA
Since the
creation of Roth IRAs in 1998, more than 14 million U.S. households have opened
a Roth to take advantage of the opportunity for tax-free earnings on their
retirement assets.¹
Before you rush out for a Roth IRA application, consider the implications of opening a Roth or
converting your traditional IRA to a Roth IRA.
Timing
and Taxes
Determining whether a Roth IRA is appropriate for you may be a
matter of timing and tax brackets. Traditional IRAs may offer tax deductions on
initial contributions, whereas Roth IRAs offer tax breaks when you take
withdrawals.² If you believe you will be in a lower tax bracket when you
retire, it may make sense to contribute to a traditional IRA and take the tax
deduction now while you are in a higher bracket. The reverse also holds true. If
you expect to be in a higher tax bracket when you retire, contributing to a Roth
IRA may be a better option.³
When
you reach age 70½, you must begin taking required minimum distributions from a
traditional IRA. There are no such distribution requirements for a Roth, which
means your funds can continue to accumulate untaxed for a longer period, if you
desire.
Roll
to Roth?
If you think your tax rate will be higher when you are ready to withdraw your
money in retirement, it may make sense to convert a traditional IRA to a Roth
and pay the taxes now. To qualify for a conversion, your adjusted gross income
cannot exceed $100,000. Keep in mind that you must pay federal income taxes on
assets converted to a Roth IRA. And if you use money from within the original
account to pay those taxes and you are under age 59½, you will be subject to an
additional 10 percent federal income tax penalty.
Traditional and
Roth IRAs can play an important role in your portfolio. Call to discuss how to
make the most of these powerful retirement savings tools.
1)
Investment Company Institute, 2005
2) To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth
IRA must be in place for at least five tax years, and the distribution must take
place after age 59½ or due to death, disability, or a first-time home purchase
($10,000 lifetime maximum). Depending on state law, Roth IRA distributions may
be subject to state taxes.
3) Eligibility to contribute to a Roth IRA phases out at higher modified
adjusted gross income levels.
