More federal spending will mean higher taxes. It has to.
Tax-rate increases for people earning more than $250,000 are already on the table. But tax increases are unlikely to stop there.
That's the bad news. The good news is a rule change can give taxpayers the chance to lock in a lower rate before taxes go up across the board.
A traditional IRA is funding with pretax dollars. Investment gains are taxed at the account holder's marginal tax rate when they are withdrawn after age 59 1/2. A Roth, on the other hand, is funded with after-tax dollars, and investment gains are never taxed. A "rollover" means putting the funds from one account into another.
Under the existing rules, individuals and couples filing jointly whose modified adjusted gross income is more than $100,000 can't rollover dollars from their traditional IRAs into Roth IRAs. Married couples filing separately were also barred from this sort of rollover.
In 2010, those restrictions will no longer apply.
Remember, traditional IRAs are tax-deferred. You don't pay taxes on the money you contribute, but you will be taxed on withdrawals. So if your marginal tax rate is higher when you make those withdrawals, it doesn't work out to be a very good deal.
But Roth withdrawals are tax-free. If tax rates are indeed higher once you start making withdrawals, you get to dodge Uncle Sam and sweeten your golden years.
You will pay today's marginal tax rate on your gains. But that could well be a far better deal than the increased rates that are coming down the pike. And to make things easier, your friends at the IRS give you two years to meet this tax liability.
This is a tax situation that can apply to anyone with an IRA. You don't need a six-figure income to benefit from a Roth IRA rollover now. And if you're currently unemployed or working for lower wages, then a Roth IRA conversion should be a top priority.
(In that case, your tax rate on the conversion will be low because of your currently low income compared with your tax rate in the future -- when your Roth IRA withdrawals will be tax free.)
Making the Most from Your Roth IRA Rollover:
While your overall investment strategy will likely stay the same once you add a Roth IRA account to your retirement plan, there are some investments that are better suited to a Roth.
For instance, if a portion of your retirement portfolio is dedicated to stocks or exchange-traded funds that are poised to appreciate, you want to keep those in your Roth. In a traditional IRA, those outsized gains would be taxed at your regular income tax rate on withdrawal. In a Roth, all those gains are tax-free. Likewise, if you hold mutual funds that make large year-end capital gains distributions, they are better held in a Roth.
To find out if a Roth IRA rollover is right for you, a good place to start is with a Roth IRA conversion calculator like this one from Morningstar. If that looks promising, talk with a financial planner or tax consultant to fully understand the benefits, rollover process and tax implications.