Some advice on Roth IRAs: Not everyone will need one


Soon, all investors can sock away retirement money that will grow tax-free. But should they?

Under recently signed tax legislation, affluent workers will be able to convert their traditional individual retirement accounts to Roth IRAs beginning in 2010. They can begin making maximum nondeductible contributions this year to traditional IRAs and convert in 2010.

Traditional IRAs give most savers an immediate tax deduction on their contributions, deferring the tax until they begin withdrawing the money in retirement. Those deductions phase out for higher-income workers. In Roth accounts, savers receive no deduction on contributions but the money grows and is withdrawn tax-free.

Currently, to be eligible to contribute to a Roth IRA single filers have to have taxable income of $110,000 or less, while married couples have to make less than $160,000. Starting in 2010, anyone can convert any amount of traditional IRAs to Roths, regardless of income, by paying any owed taxes on the traditional IRA. And taxes on conversions made in that first year can be paid over 2011 and 2012.

On the plus side, Roth conversions could let savers get ordinary income taxes out of the way on their accounts while they are relatively small, leaving all the future gains untouched. Roth accounts are also more flexible on withdrawals, with no minimum required distributions starting at age 70 1/2 .

"These [conversions] will help a lot of people, but you have to start early and plan for them," said Hugh Bromma, chief executive of the Entrust Group, a retirement plan administrator in Oakland, Calif.

But David Bizi, a financial planner in Oklahoma City, thinks "Roth conversion is a bad idea."

"Who in their right mind wants to pay income taxes in today's dollars ... not to mention that the money you didn't pay in income taxes this year compounds until you withdraw it."

When mutual fund firm T. Rowe Price performed a study on Roths versus traditional IRAs, researchers found virtually no difference in long-term account values if workers' tax brackets stayed the same in retirement.

If they converted from a traditional IRA to a Roth and paid the taxes out of other funds, or if they rise to a higher bracket in retirement, the Roth outperformed. If they dipped to a lower bracket they were better off staying with the traditional IRA. The study did not consider the impact of inflation, however, a T. Rowe Price spokesman said.

Beyond your own bracket situation, think about where taxes in general are heading.

Noting rising deficits, Social Security liabilities and a maturing economy, some advisers are warning clients we may be at a low point in terms of the overall tax burden.

Aside from handicapping where tax rates are headed, workers need to make a few other assumptions.

Have an IRA you're reasonably sure you won't need? Making the conversion will relieve your beneficiaries of paying tax on their inheritance and taking required distributions.

Under 40? Retirement experts say the Roth is extremely attractive the younger you are. If you're at or near retirement, converting usually doesn't make sense because you are simply paying taxes to secure a few years of tax-free growth.

Will you have multiple income streams in retirement, say a pension, a 401(k) plan or two and a couple of IRAs? Then you might consider a blended tax strategy, converting only the IRAs to Roths to create a bucket of money that can be withdrawn tax-free to help keep withdrawals from pushing you into a higher bracket.

Janet Kidd Stewart writes for Tribune Media Services.

Have a retirement question? Write to, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago 60611. If your letter is selected, we may include you and your question in a future column.

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