Traditional Ira

Q. I've switched to a Roth and did so in 1999. I'm wondering if I can get out of this and go back to a regular deductible IRA. --R.S., Bend, Ore. A. Yes. You have until Oct. 16 to switch back to a traditional Individual Retirement Account (IRA), said Ed Slott, a certified public accountant in Rockville Centre, N.Y. Your question suggests that you took money (or other assets) out of your traditional IRA last year and put it into a Roth IRA. When you make such a move, known as a conversion, you trigger federal income-tax consequences.

The buzz in the financial industry right now: Roth IRA conversions. Starting this year, there is no longer an income cap to convert a traditional individual retirement account or 401(k) into the tax-friendly Roth. Essentially, everyone now has access to a Roth. Congress did this to generate tax revenue. Contributions to a traditional IRA and 401(k) are often made with dollars that haven't been taxed yet. When you convert one of those accounts to a Roth, you must pay regular income tax on the amount being converted.

An astute reader uncovered a basic mathematical truth that seems to elude many die-hard Roth individual retirement account supporters: "I've been reading people who sing the praises of Roth IRAs and how they can earn more than traditional IRAs," the reader wrote. "I didn't see how this could be true, so I sat down with a computer spreadsheet program. I put a hypothetical $2,000 into a traditional IRA and figured a 5 percent return per year for 15 years. "After 15 years, I deducted the ordinary income tax (at my 15 percent bracket)

The buzz in the financial industry right now: Roth IRA conversions. Starting this year, there is no longer an income cap to convert a traditional individual retirement account or 401(k) into the tax-friendly Roth. Essentially, everyone now has access to a Roth. Congress did this to generate tax revenue. Contributions to a traditional IRA and 401(k) are often made with dollars that haven't been taxed yet. When you convert one of those accounts to a Roth, you must pay regular income tax on the amount being converted.

Last month, I sold all the shares of a couple of stock mutual funds in my traditional individual retirement account and used the money to buy bonds for the IRA. That same day, I used some of my cash reserves to buy the exact number of shares of the same stock funds in a taxable account outside the IRA. While there are no tax consequences now, I figured the switch could save me quite a bit in taxes in the long run. I have since read a paper from a...

I opened a traditional IRA in 1992. I now live with my husband and two children in North Carolina. We started a small business and lost quite a bit of money but finally have more than we need to live on. However, I'm confused as to how to save for retirement. If I understand correctly, we are not eligible to contribute to a Roth IRA because our income is too high. I did not make regular contributions to my traditional IRA, so it's still small. What do we do? Fund traditional IRAs? I am still self-employed, and my husband's company has a 401(k)

A reader reminds me of a potential pitfall of individual retirement account conversions. I've read a few articles, including yours, about the benefits of converting a traditional IRA to a Roth IRA. I did this last year (converted just enough to stay in the 15 percent tax bracket), but now it seems I'll be paying a penalty because of not making estimated tax payments. None of the articles I've read about IRA conversions mentioned making estimated tax payments to avoid a penalty. This is an important point.

THE INDIVIDUAL retirement account turns 30 this year, but the birthday celebration is likely to pass without a lot of fanfare. IRAs don't seem to generate a lot of excitement among investors these days. The annual contribution limit is smaller than some other tax-deferred accounts. The rules are complicated. Last year's tax law reduced the tax rate on capital gains and dividends, raising the attractiveness of investing outside an IRA. And President Bush has proposed a new account to replace IRAs.

Everything else being equal, the decision to keep your money in a traditional individual retirement account or a Roth IRA comes down to one question: Do you think your income tax rate will be higher now, when you're working, or later, when you're retired? With the traditional IRA, you invest with pretax dollars, and you're taxed on the money only when you withdraw it in retirement. With the Roth, you invest with after-tax dollars and don't pay any taxes on withdrawals in retirement. Simply put, it's a question of when you pay the taxes.

One of the most important and complex areas of financial planning is taxation. The manner in which a taxpayer fills out the annual revenue forms can go a long way in determining how much money is left over for other things.The past couple of years have seen the arrival of new tax breaks. The Taxpayer Relief Act of 1997 produced a crop of them, including provisions that deal with education expenses, individual retirement accounts and child tax credits.These breaks are still relatively new, and not always well-understood or fully used by the taxpayers who are eligible for them.

What a difference five years -- and a recession -- make. When financial planners were asked in 2004 for the most frequent questions from clients, the queries were largely about investing in real estate, how big of a mortgage they could swing and whether to buy or lease a car. The real estate market has since imploded, and many homeowners and would-be real estate moguls are underwater on mortgages. And the government is now giving money away to get consumers to buy or lease new cars to rescue the auto industry.

Joe Cunningham is convinced that income taxes are going up, even for middle-class taxpayers like him. Attempts to fix the economy can't work without an enormous tax increase, the Pasadena retiree says: "It will be on everybody who pays taxes, which ultimately always is the working class or retired working class." For that reason, the 68-year-old wants to convert his traditional individual retirement account to a Roth IRA. By doing so, he'll have to pay regular income tax now on the funds he transfers to the Roth.

This is a tough job market and a rough economy. No one knows that better than Kim and Millicent Elsmo. The Crownsville couple lost their jobs last year. Kim Elsmo, 60, worked in shipping and receiving. His wife, Millicent, was a corporate real estate manager whose job was outsourced to another company. Like others in their situation, the couple spent the little savings they had in their 401(k)s and borrowed from family. And Millicent, 57, tapped her Individual Retirement Account early this year to pay off debt and meet living expenses, including some big premiums to maintain coverage under her former employer's insurance plan.

Guess which kind of retirement plan Americans have stocked with the most money - traditional pensions, individual retirement accounts or defined contribution plans such as 401(k)s? I would have guessed 401(k)s and their cousins, which have been replacing "defined benefit" pension plans for decades. But the answer, said the Government Accountability Office, is IRAs. In 2004, IRAs had about $3.5 trillion in assets, defined contribution plans had about $2.6 trillion, and pension plans had about $1.9 trillion.

I am 63, my wife is 61, and we both still work. Our goal is simple: We want to maximize our net retirement income. If we have too much income, our Social Security will be taxed, and our Medicare payment increased. After 70 1/2 , there are mandatory withdrawal rules for our IRAs. The IRS, Social Security and Medicare all provide calculators, but none includes all these rules. Can you recommend a calculator that includes all these rules so I can determine my actual retirement income? - B.L. Your goal may be simple, but calculating a comprehensive strategy that minimizes taxes during retirement isn't.

For retirement savers looking to convert a traditional individual retirement account to a Roth IRA, patience will pay off. In 2010, the rules change for conversions, and until then there are a few things savers can do to prepare. The big winners in 2010 will be taxpayers with incomes above $100,000. Currently, they can't even convert to a Roth. If a taxpayer's annual adjusted gross income is also too high for contributing either to a traditional or Roth IRA (more than $166,000), he or she can make nondeductible contributions to a traditional IRA up to the annual limit ($4,000, or $5,000 if 50 or older)

How different things were a year ago. All the major stock indexes were soaring, adding to the wonderful gains of 1999. Then, stocks plummeted. As if this weren't bad enough, early in the year many investors converted their traditional IRAs into Roth IRAs, only to see the value of their holdings shrink. Unfortunately, the conversion triggered a tax bill that comes due this spring. Had these folks waited to convert when prices were lower, the tax bite would have been substantially smaller.

Individuals shut out of the Roth IRA because of their high income could participate in the popular tax-free retirement account under the federal tax-cut plan facing Congress, financial experts said. The legislation eliminates income limits for those converting a traditional individual retirement account to a Roth beginning in 2010. Currently, singles and married joint filers with adjusted gross income of up to $100,000 can convert one IRA to another. The change means that high-income individuals could open a traditional, nondeductible IRA - which has no income limits for eligibility - and then turn around and convert it to a Roth.

Last month, I sold all the shares of a couple of stock mutual funds in my traditional individual retirement account and used the money to buy bonds for the IRA. That same day, I used some of my cash reserves to buy the exact number of shares of the same stock funds in a taxable account outside the IRA. While there are no tax consequences now, I figured the switch could save me quite a bit in taxes in the long run. I have since read a paper from a...