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. How do you know whether it is 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 unaided 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. Also, in addition to no income taxes when withdrawn, with a Roth IRA you have no Required Minimum Distributions (RMDs) later on.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. Another recent article, this one on MarketWatch titled “Roth conversions easier, but are they right?” addresses this concern. Some (but certainly not all) of the factors to consider include the difference between your current and and anticipated future tax rates, the number of years until you expect to start withdrawing funds, whether you have the money available to pay the tax bill now, and your expected use needs for the funds in retirement.
As with all things financial, as well as legal … be sure to look before you leap. This is especially true when it comes to tax law changes brought by the fiscal cliff deal. In this case, you have some time to take a look at your options and discuss them with your advisors before making any changes - it's likely to take a few more months for government regulators and private companies to hammer out the specifics of the conversion process.
For more information about this or answers to your other estate planning questions, please contact us at Peak Legal Group.
Reference:
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?”
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