Roth rules will ease in 2010

Dallas Morning News

Since its creation more than a decade ago, the Roth IRA has been one of the best tax breaks around, but it’s been closed off to higher-earning taxpayers.

That will change next year.

Starting in 2010, the rules governing the conversion of a traditional IRA into a Roth IRA will allow anyone — regardless of income — to switch their existing retirement savings account.

The change in 2010 “has the potential to be a fairly big deal,” said Rande Spiegelman, vice president of financial planning at the Charles Schwab Center for Financial Research.

Depending on your financial circumstances, converting your traditional IRA to a Roth IRA might be a smart move, but consumers should do their homework first.

The benefits of a Roth IRA are substantial. Here’s why:

UContributions to a Roth aren’t tax-deductible, but earnings can be withdrawn tax-free if you’re at least 591‚Ñ2 years old and have had the Roth for at least five years.

UThere’s no mandatory distribution age as there is with a traditional IRA, which means if you don’t need the money, you can leave it in the Roth to continue growing.

In a traditional IRA, contributions are tax-deductible and taxes are paid when earnings are withdrawn. Withdrawals can begin at age 591‚Ñ2 and are mandatory by age 701‚Ñ2 because Uncle Sam wants the income taxes due him.

Despite the benefits, the decision to convert your IRA shouldn’t be automatic.

As a general rule, tax planners advise against paying a tax today that you can defer until a later date. But there are always exceptions, and converting to a Roth IRA now may well be one of them.

When you move from a traditional IRA to a Roth IRA, you pay income tax on the amount converted.

But for 2010 only, you can spread the income over two years.

If you’re considering converting your IRA, here’s a checklist to go through before deciding:

YOUR TAX BRACKET

Try to determine what tax bracket you’ll be in when you retire, and whether it will be higher or lower than your current bracket.

If the amount you convert would bump you into a higher tax bracket, consider converting only the amount that allows you to stay within the same tax bracket.

PAYING THE TAX

Make sure you know where you’ll get the funds to pay the conversion tax.

If you’re under 591‚Ñ2 and tap your IRA, you’ll also be hit with a 10 percent penalty.

YOUR TIMETABLE

James Smith, certified public accountant, says to ask yourself: “How many years from today until I start to get the money out?

“The more years I have, the more years there are for that money to build up even more money, which may overcome the tax difference,” said Smith, managing partner at Smith, Jackson, Boyer & Bovard PLLC in Dallas.

YOUR HEIRS

Are you planning to leave money for your heirs?

Because there aren’t mandatory distribution requirements with a Roth IRA, your beneficiaries can inherit the account tax-free, although estate and inheritance taxes still apply.