Roth IRAs to Expand, With Big Tax Benefits

Nov. 10, 2009 — -- Most people hate to pay taxes -- and if you hate paying them now, wait until they start going up. You're sure to hate them even more.

That's why now is the time to give serious consideration to converting at least a portion of your retirement savings into a Roth IRA, one of the best defenses against potential future increases in federal and state income taxes.

With the Roth IRA, there's no tax savings on the front end as with other retirement savings accounts, but it allows for years of tax-free growth followed by withdrawals in retirement that are entirely free from taxation. Imagine paying no income tax in retirement.

Roth IRAs can be funded by annual contributions or a conversion from existing retirement accounts.

If you convert to a Roth IRA, you pay taxes upfront on the conversion amount in return for avoiding income taxes down the road. The hope is that the future tax savings will far outweigh the cost of conversion.

The Roth IRA has been around in this form for years, but a change set to take effect Jan. 1 will allow more taxpayers than ever to enjoy its benefits.

On that date, individuals and couples who make more than $100,000 a year will be eligible to convert existing savings now sitting in a traditional IRA or some other retirement plan to a Roth IRA. Currently, such conversions are restricted to those under the $100,000 income level.

This elimination of an income cap for conversions will primarily benefit higher-income taxpayers who have been cut off from the Roth's benefits, but there's something in it for lower-income individuals as well.

A special 2010 incentive provided by Congress will allow anyone who converts to a Roth next year to delay paying taxes on the conversion and spread them out over the 2011 and 2012 tax years.