NCPA - National Center for Policy Analysis

ROTH IRA MAY BE MORE ACCESSIBLE, BUT MAY NOT BE BEST FOR ALL

September 1, 2009

Ever since its inception 12 years ago, the Roth individual retirement account (Roth IRA) has been popular with investors who love its simplicity.

Once you turn 59½, withdrawals are tax-free.  You don't have to muck around with required mandatory distributions when you turn 79½.   If you don't need the money, you can leave your Roth to your kids, who will remember you fondly when they take their own tax-free withdrawals.

But converting isn't for everyone.   Reasons you shouldn't convert your IRA to a Roth:

  • You think your tax rate will decline when you retire.
  • You don't have money outside your IRA to pay the tax bill.

If you're in a high tax bracket now and expect to drop into a lower one when you retire, you're better off leaving your money in a traditional IRA and paying taxes when you take withdrawals, says Andrew Friedman, a tax attorney and consultant to Eaton Vance, a financial services firm.

Digging into a tax-deferred savings plan to pay taxes "defeats the purpose of having a retirement account," says Pamela Villarreal, senior policy analyst for the National Center for Policy Analysis, a conservative think tank. You'll have to pay taxes on the money you withdraw, plus a 10 percent penalty if you're younger than 591/2.

There are a couple of ways to make your tax bill more manageable:  One is to take advantage of a provision in the law that allows taxpayers to spread out the payments. Taxpayers who convert in 2010 won't have to pay any taxes that year, and will be allowed to pay half the tax bill in 2011 and the balance in 2012.

Another strategy is to convert just a part of your IRA, which will reduce the amount of taxes you'll owe on the transaction, Friedman says. You can stretch out the process, converting a portion of your IRA every year until all your money is in a Roth

Source:  Sandra Block, "Roth IRA to Be More Accessible, but May Not Be Best for All," USA Today, September 1, 2009.

For text:

http://www.usatoday.com/money/perfi/columnist/block/2009-08-31-roth-ira_N.htm

 

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