It’s no doubt that the Roth IRA is a favorable option to many people when it comes to retirement planning. And after the fiscal cliff deal, the Roth IRA just keeps getting better and better for more and more people. But how do you know whether it’s right for you?
A recent CNN Money article titled “More savers can convert to Roth 401(k)s under fiscal cliff deal” says it all. Nevertheless, there is more to a Roth IRA than meets the eye.
Essentially, the Roth IRA reverses the normal IRA by requiring that you pay the income taxes on money deposited in the account up front when you deposit them instead of when you withdraw the money later. Stated differently, you’re depositing dollars which have already been subjected to income tax, rather than using pre-tax dollars. Also, in addition to no income taxes when withdrawn, with a Roth IRA you have no Required Minimum Distributions (RMDs) later on.
The fiscal cliff deal lets more people, and those of lower incomes, convert their IRAs into Roth IRAs if they settle the tax burden up front. This can help with estate planning for their loved ones, too.
According to experts, however, a Roth IRA may not be right for some folks. A recent MarketWatch article titled “Roth conversions easier, but are they right?” addresses this concern.
As with all things financial, take the time to do some research and talk with your financial advisor and accountant. This is especially true when there have been changes in the law—and with the tax code, the changes seem to come every year.
CNN Money (January8, 2013) “More savers can convert to Roth 401(k)s under fiscal cliff deal ”
MarketWatch (January 3, 2013) “Roth conversions easier, but are they right?”