All Things Financial Planning Blog

In the next few months, that steady buzz you hear is not a random cicada invasion — it is the steady drumbeat in the form of a question. If you have a traditional IRA (Individual Retirement Account), should you convert it to a Roth IRA?  Before we go there, let’s review a couple of basics around IRAs in general.

Types & Hypes: 

The contribution limit for 2009 for all IRAs (remembering you can contribute up until April 15, 2010) is $5,000 if you are under age 50 and $6,000 if you are age 50 or older.  A traditional IRA offers a potential tax deduction restricted by your income and whether you are covered by a plan at work. 

Source: http://www.irs.gov/

If you are not covered by a plan at work, this table applies for a traditional IRA:

Source: http://www.irs.gov/

Contributions to a Roth IRA are dependent only on your income as follows:

With these limitations, should you invest in a Roth IRA or traditional nondeductible IRA?  Neither one gives you a tax break through your contribution but the Roth gives you the ability to withdraw early under a few scenarios without an early distribution penalty, and the Roth distributions will be tax-free if you take the money out after age 59 ½  and the account has been in place for at least five years.

What’s better between a Roth IRA and traditional deductible IRA?  The tax deduction on the traditional deductible IRA is tempting, but in many cases, the Roth IRA will still win out.  Over time, the tax-free withdrawals of the Roth IRA should prevail over the deduction for the traditional IRA. Any other reason to Roth?  The minimum distribution rules do not apply!  Don’t want to take your money out at age 70 ½? You don’t have to with the Roth IRA.  Remember, most of the time, Roth rules!

Bonnie Hughes, CFP®
Principal
American Capital Planning, LLC
Reston, VA / Miami, FL