• Site Search
  • Search Local Business Listings
Home News Weather Sports Entertainment Living Interact Jobs Autos Real Estate Classifieds Shop Place an ad
New Jersey Business News
Latest local and international economic news, market & financial reports
Economy, Investing »

Next year will bring big changes to Roth IRA rules

By Star-Ledger Wire Services

October 26, 2009, 9:30AM

roth-IRA.jpgSince 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.

"Look before you leap," Spiegelman said. "Just because you can do it doesn’t necessarily mean you should." The benefits of a Roth IRA are substantial. Here’s why:

  • Contributions to a Roth aren’t tax-deductible, but earnings can be withdrawn tax-free if you’re at least 59½ years old and have had the Roth for at least five years.
  • There’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In a traditional IRA, contributions are tax-deductible and taxes are paid when earnings are withdrawn.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 59½ and are mandatory by age 70½ 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.

So if you converted a $100,000 traditional IRA in 2010, you could report $50,000 in ordinary income in 2011 and $50,000 in 2012.

"The tax hit is real and it’s permanent," Spiegelman said.


Comments

 (0 total)     RSS

BUSINESS
With The Star-Ledger
  • Business Home
  • Hire Me
  • NJ Real Estate News
  • Jersey by the Numbers
  • Tax Tips
  • Browse by month:
    YOUR BUSINESS
    Hire Me
    You need a job. We want to help.

    Got something to say? »
    We have new ways to discover & interact
    Check out new community tools on NJ.com!
    Got Something To Say?

    Post Free Classifieds

    BUSINESS FORUM

    Add extra spice to the... by jack2009 10/28/2009 11:55 p.m. ET

    FREE ONLINE JOBS TO EARN... by clickinter 10/28/2009 10:45 p.m. ET

    Need soccer players... by sportmanko 10/28/2009 10:23 a.m. ET