How To Determine The Best Roth IRA

Posted by Bill Timmer

February 4, 2010

by Bill Timmer

When making decisions about your retirement, it is vital that you look into the current tax implications regarding the best Roth IRA choices. A basic degree of financial knowledge is important when deciding what types of accounts are right for your retirement savings, and upcoming changes to tax law are important to consider.

A retirement choice in which your contributions are after-tax is referred to as a Roth Individual Retirement account. This is different from the pre-tax contribution option known as a traditional retirement account, in which you have not paid taxes on money going into the account and will not pay taxes until you reach retirement age. If you predict that, you will be earning less when reaching retirement and will therefore be in a lower tax bracket than you are presently, then a traditional IRA. If the reverse may be true then a Roth IRA may be the best choice for you. Remember to consider the pros and cons of each option with your tax accountant or financial advisor.

If you decide to start up a Roth IRA, know that there are Roth IRA limits to be aware of, such as the income limit. Earning more than $105,000 as a single filer? You may be ineligible to contribute fully to the Roth. This figure changes annually and you need to look at the IRS website, www.ors.gov, for the most up to date information. Another issue is that earnings distributions are not permitted to be made without penalty before age 59 . Furthermore, you must have your Roth IRA open for a minimum of five years to avoid penalties. Stay aware of contribution limits for the IRA as well. As of this writing, the current limit is $5,000 per year. Remember to subtract what you have already contributed to any traditional IRAs you may have-the total of all IRAs, both Roth and traditional, cannot go above $5000.

If a Roth, individual retirement account, sounds like something you are eligible for and would like to consider, and then you also have the option of a Roth Ira rollover. This is where funds, which are currently in a traditional retirement account, are switched over to a Roth. This is a potential windfall for you, due to tax advantages upon retirement and the potential for a tax-free source of income for you or your heirs.

Please be aware, you still do have to pay taxes on the funds that you are rolling over, which could mean that you end up with a real financial struggle at tax time. To help with this problem, starting in 2010, the AGI-that is, the adjusted gross income limits that are now in effect for the rollover to a Roth will not be applying. Higher income earners will be able to take advantage of Roth rollovers.

You also may not be aware that the IRS will be permitting you to spread out tax payments on conversions in the year 2010 to both 2011 and 2012. The IRS is going to be easing conversions and this may be relevant to you.

The best Roth IRA decision depends on your current income, estimated future income, and your particular tax situation. Knowing all of your options, especially now considering the 2010 changes to the tax rules, is important to making smart decisions about your future.

About the Author:

Bill Timmer loves helping people retire with dignity. How about you? Please visit his site on The better ROth IRAs. Also, find out information on cashing out individual retirement agreement!

tax