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In the News
Panorama
The headlines of Hispanidad.
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| 2 |
UPFRONT
Ruben Navarrette, Jr.
Will immigration reform fall by the wayside?
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UPFRONT
Dr. Eduardo Padrón
The makings of a magic city.
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| 4 |
Ask Julie
Understanding the difference in IRAs.
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upfront
Should you give your Traditional IRA a total
Makeover?
Kudos to you if you have already opened
an IRA account for your retirement. A traditional IRA allows you
to legally “hide” some money from the IRS every year
and postpone paying taxes on that income.
By Julie Stav
You also save taxes on the earnings accumulate over
time until you withdraw the money, ideally after you turn 59 1/2
years old. The advantages of an IRA come mainly from the fact that,
since you don’t have to pay income taxes on the amount of
your deposit, monies that would have otherwise gone to Uncle Sam
are now in your account working for you. Under normal circumstances,
when you withdraw money from the account you will pay taxes on what
you take out, but even after doing so, you will still end up with
more money because your pot will be larger, even after the tax bite.
In 1998, a new type of IRA was born for those workers that fell
below certain income levels: the Roth IRA. Here, the deposits go
in your account after taxes, but as long as you play the game by
the rules (being a Roth IRA owner for at least five years and keeping
your earnings in the account until your turn 59 1/2), 100 percent
of your account would be tax-free when you withdrew it. The taxes
on the gains would be forgiven.
A Roth IRA is an excellent choice for young people who may now be
in a lower tax bracket because time is on their side to allow their
accounts to grow without having to pay taxes at the end. And that
is not the only advantage! Should they need the money before they
turn 59 1/2, they have access to their deposits with no tax consequences
since they already paid taxes on that money before depositing it
(they can leave their earnings intact until the age deadline). In
essence, what this means to young investors is that a Roth IRA offers
an opportunity to have their cake and eat it too.
In spite of the popularity of Roth IRAs, many people who wished
to open these accounts couldn’t because of the income restrictions.
If you are married, filing jointly or head of household, the phase-out
range for a Roth IRA is between $166,000 and $176,000. If you are
single, the phase-out range is $105,000 to $120,000.
Now the good news: 2010 offers an unprecedented opportunity for
you to convert your traditional IRA accounts into Roth IRAs. The
one-time advantages are the following:
•The IRS is allowing taxpayers a one-time opportunity to
spread out the payment of taxes due on a Roth conversion in 2010
over 2011 and 2012 (Taxes are due on a Roth conversion because you
received a tax deduction on your initial contributions on your traditional
IRA).
•The IRS is removing income limits that have kept higher-income
taxpayers from setting up Roth IRAs.
The two major factors to consider before you decide to give your
traditional IRA “a total Roth Makeover” are your age
and your present tax bracket. Your age will affect the number of
years you can allow your account to grow. Your tax bracket will
help determine how much it will cost you today to pay for the conversion,
even though you can spread your payments over 2010, 2011 and 2012.
The earliest you can convert if you want to take advantage of the
two-year tax deferral is January 1, 2010. For
many taxpayers, it makes sense to convert as early in 2010, so begin
your homework now.
If you are considering a conversion, or if you would like to know
if you should invest in a traditional IRA or a Roth IRA, you may
use online calculators that are available to compare projections
of retirement balances using your age and tax brackets. You may
find one of these calculators at www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx.
You may also get in touch with the custodian that has your IRA account,
your tax professional or your financial advisor for more information,
or check out the official IRS at www.irs.gov.
Listen to Julie Stav’s
radio program Monday through Friday on your local Univision radio
station.
For more information visit
www.JulieStav.com.
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