NCPA - National Center for Policy Analysis


January 4, 2010

Beginning in 2010, a new rule change allows people with an Individual Retirement Account (IRA) to reduce their tax burden at retirement by converting a traditional IRA into a Roth IRA.  Before deciding if such a conversion would benefit you, there are a few important things to consider, say Pamela Villarreal, a Senior Policy Analyst, and Bethany Lowe, a Legislative Assistant, both with the National Center for Policy Analysis.

What are the differences between the two accounts?  A traditional IRA allows individuals with wage income to set aside pretax dollars in savings which are taxed when they are withdrawn during retirement:

  • Contributions made to a traditional IRA are limited to $5,000 annually ($6,000 for individuals age 50 and over).
  • The tax deductibility of traditional IRA contributions is phased out at higher income levels for those who are covered by an employer-sponsored retirement plan.
  • Individuals can no longer contribute to traditional IRAs once they reach age 70-and-one-half years, and they must begin making minimum withdrawals.

On the other hand, Roth IRAs require after-tax deposits and allow tax-free withdrawals:

  • While anybody can convert to a Roth IRA, single filers whose modified adjusted gross income is $120,000 or more cannot make contributions to a Roth IRA (for married couples filing jointly, the cap is $176,000).
  • The maximum contribution limit for the Roth IRA is the same as the traditional IRA — $5,000 in 2009 ($6,000 for individuals age 50 and over).
  • However, contributions can be made to a Roth IRA even after age 70-and-a-half, and the accounts are not subject to minimum mandatory withdrawals during the retirement years.

Source: Pamela Villarreal and Bethany Lowe, Roth 2010: Should You Convert?" National Center for Policy Analysis, Brief Analysis No. 684, December 30, 2009.

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