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To Roth or Not to Roth?
Now that 2010 has arrived, people whose incomes were previously too high to permit them to rollover a traditional IRA to a Roth IRA are calling their investment houses about making conversions. That's because for the first time, even if your annual income exceeds $100,000, you can convert a traditional IRA -- or a SEP IRA, Simple IRA or 401(k) or 403(b) plan held with a former employer -- to a Roth IRA.
What's all the excitement about? To review, a Roth and a traditional IRA are effectively the opposite of one another. You get a tax deduction by contributing to a traditional IRA, but the money you take out is taxed at ordinary income tax rates. While there is no immediate tax benefit for contributing to a Roth, you don't have to pay tax on the money when you withdraw the funds in retirement. Also, while the original owner of a traditional IRA is required to start distributions after age 701/2, the original owner of a Roth IRA account is not required to take minimum distributions. One major downside to converting from a traditional IRA to a Roth is that you have to pay income tax on the amount you convert.
Many investment firms are pushing these conversions because they represent new sources of funds to manage. But should you make the conversion? Financial articles on the pros and cons of Roth IRA conversions have proliferated like bankers' bonuses in the past few weeks. Below is a roundup of a few that look particularly helpful. The general advice is: don't rush in before you understand all the variables.
- Kiplingers: "The New Roth Rollover Rules Explained"
- retirementrevised: "Should you join the Roth conversion parade?"
- Time magazine: "Traditional IRA vs. Roth IRA"
- MoneyWatch: "Don't Rush Into Roth IRA Conversions"
- The New York Times: "Deciding Whether a Roth Is Right"