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Roth Offers Significant Tax Savings |
The main benefit to a Roth is the tax-free growth. |
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Unlike traditional deductible retirement contributions, the Roth IRA or Roth 401(k) is a non-deductible form of retirement contribution. As with all things tax related, this subject can get extremely complicated. Generally, single taxpayers with modified adjusted gross incomes under $114,000 and married filers under $166,000 qualify for this form of contribution. The dilemma is whether the benefit of a tax deduction today is worth more than paying the tax today and having tax-free withdrawals at retirement. There are many variables in this decision, but one thing is for certain – at some point you’ll probably be glad to have this tax-free pool of money. For new professionals just out of college and in a low tax bracket, I’d recommend a Roth based on the likelihood of your income and tax bracket increasing as you mature. The main benefit to a Roth is the tax-free growth. This becomes really important if you believe that tax rates are going up. Another benefit is the diversification of your retirement income – something that you’ll probably appreciate once you are living off your assets and not working. There is no requirement to begin withdrawals at any age. This also makes Roth accounts a far more attractive asset for your heirs than traditional pretax retirement accounts. Traditional accounts can be converted into Roth accounts. Once again, there are income limitations. This year, Roth conversions are only available to taxpayers with modified adjusted gross incomes less than $100,000. The $100,000 income restriction is set to be lifted Jan. 1. This change will open the door to a tremendous opportunity for millions of taxpayers. If you do your conversions during 2010, federal law allows taxpayers to delay taxes by including the taxable portion of the 2010 conversion in taxable income for 2011 and 2012. For many not eligible for IRA contributions because of your participation in a corporate retirement plan, consider making a non-deductible IRA contribution for 2008, 2009 and 2010. Then you can convert these to Roth IRAs in 2010 and avoid tax completely on future gains. John P. Napolitano |
Financial planning is one of the fastest growing careers in America today. Have you ever wondered what you need to become a CFP® and how you can make it a successful career path? Written by veteran certified financial planning expert, John P. Napolitano, this book contains information on: education and training; the certification process, including differences state-by-state; tips for setting up in private practice; self-marketing techniques, including networking and client base expansion; and the all important client management and trust building.
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