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Top Earners : Ready For Roth IRA In 2010?

According to USA Today:

The $70 billion tax bill that’s likely to clear Congress this week would let upper-income taxpayers shelter future investment gains from taxes by converting traditional individual retirement accounts into Roth IRAs.
According to the current law, married taxpayers who have more than $16K in adjusted gross income and singles who have more than $110k can’t invest in a Roth. Starting in 2010, those people could contribute the maximum to a regular IRA, then turn around and convert it to a Roth to avoid capital gain taxes upon withdraw.

However, there are few things to keep in mind:

  1. The taxes on conversion could take a bite out of your earnings. Not only you have to pay the tax on the contribution, but also the capital gain when you make the conversion.
  2. What is your tax bracket going to be when you retire? If you are in a lower rate, then it might not make sense to pay higher tax up front to save lower tax rate later.

Here is an example to understand the impact of this law:

According to Deloitte Tax analysis on an conversion of 200K from traditional IRA to Roth IRA. In the scenario, the taxpayer would pay 33% on the account converted if he is in 33% income bracket. Assuming an 8% annual return on the investment, the taxpayer would come out ahead if his retirement tax bracket were 25% but lose money if his retirement tax rate were 15%.

So if you want my personal opinion, I am not too excited about this new law. Especially, I am a believer in saving today’s dollars. Here is a post I wrote in comparing Roth IRA and 401K. So I am just fine with the traditional IRAs.

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