The Flexible Roth IRA Keeps Getting Better with Age

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New rules in 2010 make this retirement vehicle worth another look—especially to those who weren’t able to open a Roth before

Despite the signs that the economy is making a comeback, it isn’t easy to find Main Street financial news that’s worth much of a smile.

But changes to the rules surrounding the popular Roth Individual Retirement Account (IRA), signed into legislation in 2006 and going into effect in 2010, are a good reason for some investors to take a break from licking their retirement portfolio wounds. They might even turn some of those lemons of portfolio-value loss into a bit of retirement lemonade.

“This is a truly significant opportunity for investors, but it won’t be available forever,” says Financial Advisor Joe Dermenjian, of Glendale, CA-based ING Financial Partners office. “It’s important that investors know about the changes and what they could mean for their retirement nest egg.”

The significant opportunity is the removal of income limits on conversions to a Roth IRA from a traditional IRA or qualified plan, such as a 401(k) or 403(b), plus the ability, in 2010 only, to spread the tax bill on the conversion over 2011 and 2012 filings.

Not smiling yet? “It’s not as straightforward as we’d like it to be when explaining it all to clients, and yes, there are taxes to be paid up front; but it is satisfying to see the ‘Aha!’ moment when they realize how it can help them in the long run,” says Joe Dermenjian.

The key to remember is that while a traditional IRA is tax-deferred, meaning you pay taxes on your principal—and any gains—when you withdraw it, the Roth IRA uses after-tax dollars, so you can make qualified withdrawals of your principal and your gains tax free. Because the tax cuts of 2001 are set to expire in 2011, future retirees could actually find themselves in a higher tax bracket in their golden years than they are right now.

Coupled with recent depreciations in portfolio value, 2010 could be the least expensive year to convert as far as taxes are concerned (you’re converting fewer dollars, so paying fewer taxes, than you would if the market fully recovers). And since you won’t pay taxes on the qualified withdrawals in retirement, you stand a chance to come out ahead. That’s where the smile comes in.

The Roth also comes with other benefits, such as no required minimum distributions, tax-free qualified withdrawals for heirs, and the ability to continue making contributions after age 70½, if you or your spouse are still working and earning income, among others.

“You don’t necessarily want to run out and convert all your retirement accounts to a Roth,” says Joe Dermenjian. “Some may benefit by having some of their retirement funds in a mixture of tax-free and tax-deferred accounts. And for some, converting to a Roth just wouldn’t pay. The bottom line is you should talk with a financial professional about what makes sense for you.”

To contact Joe Dermenjian, call 800-464-7511 at 655 N. Central Ave #1700 Glendale, CA 91203. . Securities offered through ING Financial Partners, member SIPC. Neither ING Financial Partners nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.


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