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Roth IRA might fit your plan to retire

By HELEN HUNTLEY
Published May 28, 2006

Are you ready to Roth?

Congress put the spotlight on Roth IRAs this month by making it possible for anyone to convert money in a regular IRA to a Roth. Maybe your response was "Great! I can't wait!" Or maybe it was "What's a Roth and why would I want to do that anyway?"

As you've probably noticed, Congress can't leave the tax law alone. In the name of encouraging people to save for retirement, it has created three different types of IRAs plus numerous other savings plans.

The most distinguishing feature of the Roth IRA is that money goes in after-tax and comes out tax-free if you comply with the rules. Mainly that means leaving the money in the account at least five years and waiting until you are 59½. Another noteworthy feature is that there are no required minimum withdrawals, making a Roth a nice way to leave a legacy to your grandchildren.

Until now, high-income people haven't been allowed to put money in Roth IRAs. To contribute to a Roth, your income must be less than $110,000 if single or $160,000 if married filing jointly. To convert money from a regular IRA to a Roth, your income must be less than $100,000 not including the amount of the conversion whether married or single.

Starting in 2010, anybody can do a conversion by paying the taxes on the money at their regular income tax rates. No 10 percent penalty applies. As an added bonus, if you do it in 2010, you can spread the tax payment over two years. Congress thinks that enough people will convert to bring in an extra $6.4-billion in taxes through 2015. And of course people with incomes below $100,000 can convert right now.

But is converting worth paying all those taxes? Here are the points to consider:

n Do you have the money to pay the taxes from some source other than the IRA? If not, forget it.

n How does your tax rate compare to your expected tax rate in retirement? If you think your tax rate is going down in retirement, converting now may cost you.

n When do you want to start withdrawals? If the answer is "never," conversion is a way to keep the money intact. If it's 30 years from now, conversion gives you lots of years of tax-free growth. If it's five years from now, it's probably not worthwhile unless your income bracket is particularly low.

Some mutual fund companies have calculators on their Web sites to give you a personalized estimate of whether converting will be pay off. At www.troweprice.com, select "access tools and calculators" from the shortcut pull-down menu, then click on "retirement planning tools" and scroll down to "IRA calculator."

Even if you don't want to convert, contributing to a Roth IRA is a great idea if you are eligible. You can contribute up to $4,000 for 2006 ($5,000 if 50 or older).

If your income is too high to contribute to a Roth, you can contribute to a traditional IRA. That will give you a bigger chunk of money to convert in 2010. However, keep in mind that when you convert, you cannot escape taxes by withdrawing only your nondeductible contributions.

I have held various EE bonds in my son's name since he was born. (I am the beneficiary.) He is 17 and will attend college this August. I would like to know if he chooses to cash in the oldest ones and use them for dorm expenses (since he will not have those expenses adequately covered by scholarships and grants), will he or I have to pay the taxes on the interest that has accrued? Do I (or he) submit this information to the IRS upon filing 2006 taxes?

Yes and yes. Since he is the owner, he will be the one to cash them and report the interest on his income tax return for the year they are cashed.

In many instances, savings bonds bought in the name of a parent can be cashed tax free to the extent the money is used to pay tuition (not room and board). Since your son has scholarships to pay his tuition, he would not be eligible for this break even if the bonds were in your name.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or log onto www.sptimes.com/blogs/money where you also can see other questions and answers.

[Last modified May 28, 2006, 07:26:10]