Where are all the Jobs?: Feb 10, 2011

Thursday, February 10, 2011

Moola Days

Posted: 10 Feb 2011 02:22 PM PST

You’ve probably heard of both Traditional IRA and Roth IRA, and most likely have heard that one or the other is simply better. This is not true. One type of IRA may benefit you but may not be so beneficial to another person. So this article isn’t telling you to convert to Roth IRA; it’s meant to be used as basic research to begin figuring out what works best for you.

The Pros

The primary benefit of switching from a Traditional IRA to a Roth IRA is the absence of income tax when you withdraw funds during retirement. But there will be tax if you withdraw funds before you reach the retirement age. However, you do pay taxes when you convert or contribute funds. This can be advantageous to you if you contribute funds to your Roth IRA in a low income year, since you will be in a lower tax bracket. It can also be advantageous if you know if the government is going to increase the tax rate in the following year. This way you can contribute earlier with lower tax, and not pay the higher tax later. Another benefit of the Roth IRA is that there are no forced distribution. You can keep your funds in the Roth IRA for as long as you like, where as in traditional IRA, you would have to retrieve your funds at age 70.

The Cons

Now, Roth IRA may sound better than traditional IRA right now, but there are disadvantages to the Roth IRA. The contributions you put into Roth IRA are not tax deductible. This means that you won’t have any tax savings from contributing, where as in traditional IRA, the funds you put are tax deductible. There are also eligibility rules to be able to contribute to Roth IRA. We will touch on that later. And there is also unpredictable changes in the future. For example, you may not live to the age of retirement, so you won’t get the tax benefit from a Roth IRA. Congress may also change the tax benefit. You have to account for unpredictable changes in your decision to convert to Roth IRA.

Possible Limitations

To be eligible for Roth IRA, you have to be under the income limits. The 2010 numbers for single filers are 105,000 to 120,000 dollars. For joint filers, the numbers are 167,000 to 177,000 dollars. Once you go over these limits, your ability to even put a partial contribution disappears. However, there is a known loophole to contribute to the Roth IRA. I will not go into detail in this article, but it basically involves contributing to a non tax-deductible IRA, then converting that contribution to a Roth IRA right afterwards.

So the question remains: should you convert to the Roth IRA? You have to decide for yourself. Many factors are involved in choosing the best retirement savings plan, but "best" is subjective and personal. A clear cut example of this: if you do not think you will live to the age of retirement, then you shouldn’t convert to Roth IRA. You would actually lose money because you would never gett a chance to use the withdrawal tax benefit, and you would’ve paid taxes to contribute the funds. I would highly suggest to evaluate your personal finance and life situation before being set on a type of IRA. I would also recommend to get a professional personal finance adviser with a lot of experience. These people do these types of research and recommendations for a living, so they can help you more than any internet article can. Do your research and plan ahead.

Should you do a Roth IRA Conversion? is a post from: Moola Days