A Roth IRA is a retirement account that is funded with after taxed dollars (as opposed to pre-tax dollars such as a 401k) and grows completely tax free. The best part is while in retirement there are no taxes due on any money pulled out from a Roth IRA. In the past many people did not consider Roth IRAs because either they were limited on the amount they could contribute, or because of their higher income, they were unable to contribute anything at all to a Roth. That is about to change in 2010.
In 2010 the government is allowing those with IRA’s or other pre-tax qualified plans to go ahead and pay the income taxes today and “convert” their retirement account to a Roth IRA. The regular income taxes will have to be paid on the amount converted to a Roth IRA. However, in 2010 the federal government is allowing individuals to pay the taxes equally over a two year period, following the year of conversion, where normally they would have had to pay in the year their account was reclassified to a Roth IRA. That means someone converting to a Roth IRA in 2010 would owe ½ the income taxes in 2011 and the other half in 2012.
Roth Conversions are good for those who believe taxes may go up in the future. Having a tax-free source of income in retirement could mean you have more income to enjoy while you’re alive because you are not worried about pulling out more money in a higher tax bracket. Also, there are other less obvious benefits to having a Roth IRA in retirement under current tax law. Some benefits include the possibility of the reduction of the taxes paid on social security benefits and also lower Medicare Part B supplemental health insurance premiums.
The Roth IRA is something everyone should at least consider. As always it makes sense to professional advice to see if something like a Roth IRA conversion makes sense for your particular situation.