One very important tax law change to pay attention to this year is the rule changes that apply to Roth IRAs. This year the income limitation goes away so almost everyone can take advantage of the Roth IRA and, for this year only, if a conversion is done from a traditional IRA to a Roth IRA, an investor can pay the taxes in two years, instead of just one. This tax planning opportunity could mean lower taxes in the future.

Let’s review the differences between a Roth IRA and a Traditional IRA.  Normally, when contributions are put into a retirement account like a traditional IRA or 401(k), the money is pre-tax and the money grows tax-deferred.  This in turn saves the person money in taxes today and in turn they will pay taxes in the future when a withdrawal is made, usually in retirement.

The Roth IRA contributions on the other hand are after-tax money and grow tax-free.  The Roth IRA account grows tax-free and all withdrawals, including profits are not taxable under current tax rules as long as the account has been opened at least five years and the investor is over the age 59-and-a-half years old.

Will taxes be higher or lower in the future? That is the first question to ask. We think taxes will be higher.  For one, the government has spent so much money that taxes are likely to go up.  Currently, our tax rates are still one of the lowest in history. Second, the old concept of retirement accounts was save money on taxes now while you are working.

Then in retirement you will have less income and be in a lower tax bracket.  For most of the people we meet with, retiring with a lower standard of living doesn’t really sound too good. Instead, most investors want to be successful in investing and savings and have a retirement that allows them to enjoy the fruits of their labor.

The old concept just doesn’t make a lot of sense for many families and the Roth is a great concept to consider. The Roth IRA usually benefits long-term successful investors who feel taxes will be higher in the future.

There are a lot of items that need to be reviewed before the conversion takes place. Consider using unique planning strategies. These options can offset a portion if not all of the taxes that would normally be due on the conversion. Some investment companies offer bonuses for long-term investors. If the account is going to stay open for 10 years or longer, consider using a bonus annuity to pay the taxes or to jump start the tax-free account.

Before you invest with any company, do your homework because annuity guarantees are only as good as the issuing company. Where the money is held at, known as the custodian is an important factor beyond product choices. The other important factor involves how your account will transfer to your beneficiaries at death.

Make sure the custodian offers beneficiaries stretch out options. This allows your family to take distributions over their lifetime, instead of being forced to take a lump sum payment at death.  If the primary goal is to protect the spouse or to leave as much money to children or charities, a life insurance plan can be a better option.  I know, life insurance … yuck! But, insurance can be a way to leverage dollars to get more benefits and still be a great part of a comprehensive investment plan.

If the primary attraction of a Roth IRA is the ability to have tax-free profits, then an investor should use products that limit losses. There are several options here that are safe, but still offer the potential for good returns. Our conclusion is before you sign the paperwork to convert your current account, you need to get educated and have a detailed analysis done first.

Got a question for The Retirement Guys? Send your e-mails to letters@toledofreepress.com or you can reach them by calling (419) 842-0550. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  The Retirement Guys are not an affiliate of NEXT Financial Group. Their office is located at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. NEXT Financial Group, Inc. nor its representatives provide tax advice.

Tags: Roth IRA

This entry was posted on Friday, January 15th, 2010 at 12:00 am and is filed under Retirement Guys, Toledo Business Link.
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