Tuesday, August 18, 2009

Roth IRA Change May Not Be ‘Game Changer’ for Savers

Earlier today I came across this fascinating article from Bloomberg.com, discussing the changes to the US tax code that would allow more taxpayers to convert to a Roth IRA. In the article, the author discusses how changing may not make as big of a difference as one would think, and provides several examples of why.

Changes to U.S. tax laws next year give high-income earners planning for retirement a decision to make: pay now or pay later.

Taxpayers making more than $100,000 a year in adjusted income will be allowed to convert to Roth IRA accounts from traditional IRAs after that limit is lifted at the end of the year. That means 16 million Americans, according to tax returns filed with the Internal Revenue Service in 2007, can consider whether they want to make tax-deductible contributions if they have a traditional IRA or pay the taxes up front and have tax- free withdrawals during retirement with a Roth IRA.

Which is better depends on future tax rates and how much the conversion will cost. It may not make sense to pay taxes today at a higher rate because many investors will be in a lower tax bracket during retirement, according to Tom Orecchio, a fee-only adviser at Modera Wealth Management in Old Tappan, New Jersey.

“From a tax perspective, I think when people do the math, it’s not going to be as game changing as they expect it to be,” Orecchio said.

Higher-income households that could benefit from the income limit changes are not rushing to switch, according to a survey released today by San Antonio-based United Services Automobile Association. The national survey of 1,259 adults between 45 and 64 years of age shows that for those with an IRA and a household income of $100,000 or more, 9 percent are planning to convert in 2010.

Tax Assumptions

Most IRA assets are held in traditional IRAs, based on a June report by the Investment Company Institute, a Washington- based trade group for mutual funds. Investors held $3.2 trillion, or 89 percent of IRA assets, in traditional IRAs at the end of 2008. Roth IRAs accounted for $165 billion, or 5 percent, of all IRA assets.

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