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If you are a mature American with a large IRA, you have a big decision. Should you convert to the new so-called Roth IRA? Almost certainly, yes. If you qualify for a conversion, and take advantage of the option, you may save thousands of dollars for both yourself and your heirs. Roth IRAs, unlike traditional IRAs, have a simple premise: you pay income tax going in, rather than when you pull out. People who are still working and are eligible to contribute more have to think about what kind of IRA they should contribute to. This is especially true if you have already accumulated a large IRA, perhaps from the rollover of a retirement plan, and if you want to know whether you should convert that pot of money into a Roth IRA. If you have accumulated a large IRA, you convert the entire account to a Roth IRA. Upon conversion, you must declare the entire IRA balance as taxable income and begin paying taxes on it. From that point on, the IRA is tax-free during compounding, and tax-free when you pull money from it (if you have held the Roth IRA for at least five years, and you are age 59 1/2).
Are you better off waiting to pay taxes, or paying them now? For many, paying your taxes owed now is the smart thing to do. Forget the math... just know that politicians like to spend other people's money. After all, Uncle Sam could collect his pound of flesh later, or just a few ounces now. As luck would have it, he would rather have his money now, even if the long-term goal is more reduction of the budget deficit. In this era of budget balancing and deficit spending, politicians need collections today to show that they are "balancing the budget." Looking long-term, Congress will have problems later, but only after our hard-working politicians are probably long-gone. Congress' short-term outlook can be turned around to work for you. There are restrictions on conversions. For instance, you can convert only if your AGI (Adjusted Gross Income) is no more than $100,000 in the year you make the switch, assuming you're single or married filing jointly. Who should not convert their existing IRA to Roth? Someone whose tax bracket is higher now than his or his heirs' tax bracket is likely to be whenever the money is going to be spent. Also, be very careful if you aren't sure about falling under the $100,000 ceiling. Converting and then discovering later that your income was higher could blow up in your face. From an estate planning standpoint, if your main goal is to accumulate as much as you can and leave it for your heirs, conversion can make a lot of sense. Traditional IRA owners must make distributions by age 70 1/2. However, Roth IRAs require no minimum distributions each year during the life of the IRA owner, nor on the life of the IRA owner's spouse. If you want to keep your money growing on a tax-preferred basis, that's great news.
Suppose you have $20,000 of junk bonds in a tax-deferred IRA, and can make that money triple by the time you spend it. For simplicity, you are in a 50% tax bracket now, and will be in the future (which is not too far off, considering state and local income taxes). Suppose you leave your IRA as is. The IRA grows to $60,000, at which point you pull it out and have $30,000 of spendable cash after taxes. But suppose you make the conversion to a Roth IRA. You convert, using $10,000 from the account itself to pay the immediate tax bill. The remaining $10,000 triples to $30,000. In this scenario, there's no difference between the two...until you consider another option. Suppose you come up with the $10,000 from some other source of cash that would not have qualified for tax-deferred compounding. With outside cash used to pay for the conversion taxes, your Roth IRA triples to $60,000, all of it tax-free. The IRA is $30,000 bigger. You're missing that $10,000 from your outside account, and that money could have grown. But it almost certainly could never have tripled to $30,000, since you would have been paying taxes on the income all along. If your outside account had grown to, say, $18,000, then converting to a Roth IRA nets you an additional $12,000. Not a bad profit at all. Remember: your taxable account should have accumulated interest and compounded even more. In this case, the "time value of money" is definitely on your side. The Roth trade is a bad one for Uncle Sam, and a good one for you.
Our research team has been at it again. They've put together a free Information Kit on the Roth IRA, covering the facts you need to know before making the switch. Our Account Specialists are knowledgeable on all the new Roth IRA tax laws, and can help you wade through the perceptions and confusion. Request your FREE copy of The Roth IRA Special Report by contacting us today!
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The Taxpayer Relief Act of 1997
Uncle Sam could collect his pound of flesh later, or just a few ounces now.
The new Roth IRA requires no minimum distributions each year... so your money may grow a lot faster.
Call 800-500-0037 for Your Own Copy of the Roth IRA Special Report! |
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The Roth IRA:
