In January 2010, savers were finally able to take advantage of tax legislation that was signed in May 2006. Individuals can now convert their traditional IRAs or 401(k) accounts into Roth IRAs.
Reasons to Consider a Roth IRA Conversion
The main advantage Roth IRAs have, over other traditional retirement accounts, is that withdrawals made after age 59½ are tax-free. This is because Withdrawals made from this type of retirement account, during the retirement years, are tax-free because Roth IRA contributions are made with taxable money.
In the past, Roth IRAs were best suited for those who were in a lower tax brackets in the contribution years, but expected to be in higher tax brackets during the retirement years. However, changes to IRA rules for 2010 make Roth accounts more appealing to a wider variety of savers.
In 2009 and previous years, only those who had an adjusted gross income (AGI) of $100,000 or less were able to convert retirement plans into Roth IRAs. But in 2010, many individuals with an AGI of more than $100,000 can convert retirement savings, from a traditional IRA or 401(k) account, into a Roth IRA. If you are considering the conversion, keep in mind that the converted funds are taxable.
Reasons to Convert to a Roth IRA This Year
- You can spread your tax liability into 2011 and 2012--instead of paying all the taxes owed on the conversion in one year, the taxes can be split across your 2011 and 2012 tax returns
- Take advantage of current market conditions. Taxes on a Roth conversion are paid on the amount being converted. If your IRA or 401(k) is worth less than it was last year, you pay less in taxes
- Tax experts predict that tax rates may rise in future years, so it could make sense to convert now when tax rates are relatively low
- Roth IRA's have two estate planning benefit: First, the beneficiaries do not pay taxes on the cash left in the account. Second, no minimum withdrawals are required, so the entire account can be left to heirs
While considering the financial benefits of your retirement fund, you may also want to investigate the option of a reverse mortgage. Homeowners over age 62 can use a reverse mortgage to supplement income, or use it as an emergency fund in the form of a line of credit. Compare quotes from reverse mortgage lenders to see if one is right for you.
Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Urban Land Magazine, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now at Amazon.com or from www.MicheleLerner.com.