What’s the difference?
With a traditional IRA, contributions
may be tax deductible, depending on your
income and whether you’re covered by an
employer retirement plan. However, you
must pay income taxes on the money when
you take it out during retirement, and withdrawals must begin before you reach age 70½.
With Roth IRAs, you cannot deduct contributions on your current tax return. However,
you don’t have to pay taxes on the money
when it’s withdrawn, as long as you wait until
a;er age 59½ to take it out.
“Roth IRAs may o;er greater potential
for long-term investors because they are not
subject to taxes on withdrawals,” explains
Victoria Collins, senior managing director
with First Foundation Advisors in Irvine,
California, a Costco member who helps clients consider the pros and cons of Roths compared to traditional IRAs.
No small change
At the beginning of this year, though,
these income limits were removed for conver-
sions of traditional IRAs to Roths. “Under the
right circumstances, converting from a tradi-
tional to a Roth IRA can be a great deal,” says
Suzanne Durbin, a ;nancial adviser and part-
ner with GV Financial Advisors in Atlanta
who has been advising clients about Roth IRA
conversions. “It’s an opportunity for many
high-income individuals to enjoy the bene;ts
of Roth IRAs for the ;rst time.”
There is one significant drawback to
making a Roth IRA conversion: Taxes must
be paid on the value of the IRA at the time of
conversion. However, you can pay the tax
over two years (in 2011 and 2012) if you com-
plete your conversion this year. “;is can be
an excellent planning tool,” says Collins.
Some people ;gure they’ll just pay the tax
out of IRA assets, but, depending on your age,
this may not be a good idea. Why? If you’re
under age 59½, a 10 percent penalty will be
assessed on IRA assets that aren’t rolled
directly into the Roth. “;erefore, the best
candidates for a conversion are individuals
who have enough money in a liquid account
to pay the taxes,” says Durbin.
Don Sadler is a freelance writer in Atlanta
specializing in business, ;nance and retirement planning.
The Costco Connection
If a Roth IRA is not right for you, Costco
Services offer several other programs that
can help you reach your financial goals.
Information about high-yield online savings
accounts from Capital One Direct Banking,
and online investing and small-business
401(k) plans from ShareBuilder, can be found
on Costco.com. Just click on “Services.”
Pay the tax now … or later?
From a tax-planning standpoint, the timing may be good to complete a Roth conversion
this year—while the value of many accounts is
still down from their peak and before tax rates
go up, as many economists expect.
In general, those with longer time horizons may bene;t the most from a Roth conversion. “;ey get the most bang out of tax-free
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at a glance
ALTHOUGH INCOME LIMITS have been
lifted for converting a traditional IRA to a Roth
IRA, they still apply to opening and funding
Roths. If you earn more than $120,000 this
year and you’re single, or $176,000 if you’re
married and filing jointly, you cannot open
or contribute money to a Roth IRA.
In 2010, you can make total IRA contributions (both traditional and Roth combined) of
up to $5,000, or $6,000 if you’re age 50 or older.