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Business // Thinking Smart
David S. Chang

Is The Roth IRA Right For You?

One of the best ways to save for retirement is through individual retirement accounts (IRA). There are two different types of IRAs, traditional and Roth.

A Roth IRA has unique characteristics that can make it a very effective retirement-savings tool, but it isn’t for everyone. If you are deciding between a traditional and Roth IRA, here are some things to consider.

Future Tax Bracket. Some of the benefits a Roth has over a traditional IRA is that withdrawals are tax-free and there are no required minimum distributions (RMDs), minimum amounts that you must withdraw annually from a retirement account once you hit 70-and-a-half years of age. There are some other rules associated with RMDs. Talk to a financial professional for more information.

Since withdrawals are tax-free, if you think your tax bracket will be higher when you retire than it is today, then a Roth IRA may be right for you. A Roth IRA is better when your marginal tax rate at the time of withdrawal is the same or higher compared with your marginal tax rate at the time of contribution. If you believe your tax bracket will be lower when you retire than it is today, then you may be better off taking the up-front tax de duction and contribute to a traditional IRA.

Future and Current Income. If your income exceeds the Roth IRA income limits, you will not be allowed to contribute to a Roth. For 2013, the phase-out range to contribute to a Roth for singles is $112,000-$127,000. If you are married and filing jointly, it is $178,000-$188,000. If you are in the phase-out range, you can make partial contributions.

In the past, if you wanted to convert your traditional IRA to a Roth, your income needed to be less than $100,000. The IRS rules recently have changed, and the income limit has been removed. With the cap no longer in place, high-income earners now can convert as long as they pay the respective taxes on the conversion and it is done within 60 days. If you are a worker who expects to make more money in the future, than a Roth IRA may be the best for you. If you do not, and you also anticipate your tax bracket to be lower, then a traditional IRA may be right for you.

Beneficiaries. If leaving an inheritance that lasts as long as possible is important, a Roth IRA may be right for you. With a Roth, your heirs can make withdrawals forever without any tax penalties. With a traditional IRA, they will have to pay taxes and also take the RMDs.

IRA Use in Retirement. If you plan to use funds from your IRA and are close to retirement, it may not be wise to convert to a Roth, because you have to pay the taxes up front and it takes a certain number of years to earn back the money to justify the tax-free withdrawals. Visit artof-thinkingsmart.com for a Roth conversion calculator that shows if you are better off converting. In addition, if you can’t afford to pay the taxes to convert or don’t want to pay the income tax up front, it makes sense to stay put.

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