As the end of the year draws near, I try to think of the Year End moves and financial planning that one may wish to consider. The consideration of a Roth and how it might benefit you continue to enter my thoughts.
If this year you fall into a lower tax bracket than usual, this may be a good time to convert some money from a regular IRA to a Roth, just enough to ‘top off’ the current bracket you are in.
If your income is too high to be allowed to save in a Roth IRA, you may consider saving in a non-deductible IRA as the law allowing conversion will change: from RothIRA.com “Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.” This offers a remarkable opportunity to save post tax (you will only owe tax on the growth from now until 2010*.) and enjoy tax free growth and withdrawals when you retire. If left as post-tax deposits in the IRA, it woul be subject to full, ordinary income rates at withdrawal.
*For any readers who have IRA deposits which are pretax, the conversion rules require you to prorate your entire IRA balance to calculate what is taxable at conversion. e.g. If you made $10K in pretax deposits, and $20 in non deductible deposits, and the account is now worth $50K, 80% of Roth conversion would be taxable (10/50 = 20% is not taxed). If your only pretax savings is in 401(k) accounts, this will not impact you. Always glad to read feedback on my postings, don’t be shy.