IRAs: Opening Up The Account

Created for lower-income earners, Roth IRAs feature several tax advantages that have been off limits to individuals making more than $110,000 or couples making more than $160,000. That will change in 2010, but taxpayers should be preparing now to take advantage of it. Planners say people should consider putting more money into a regular IRA account this year and for several years in anticipation of being able to convert it to a Roth in four years, when they can do so regardless of income.

Contributions to a traditional IRA that were tax-deductible will be taxed when converted to a Roth IRA, as will earnings on that money. Non-deductible contributions to the regular IRA that are converted to a Roth won't be taxed.

Roth IRAs have several potential benefits for taxpayers of all income levels. Money from a Roth can be withdrawn at retirement tax-free, while withdrawals from traditional IRAs count as taxable income. And unlike traditional IRAs, from which a retiree must start making withdrawals at age 70 1/2 or face a penalty charge, a retiree is not required to ever make a withdrawal from a Roth. A Roth account can be held untouched and bequeathed to children or grandchildren tax-free, making it a valuable estate-planning tool.

People who will need the money that's in their regular IRA during retirement might find it makes no sense to plan for a Roth conversion. But for people above the current Roth income limits who won't need the money for 10 years or so, or possibly not at all, planning for Roth conversions could make a great deal of tax sense.

In 2006, the maximum contributions allowed for IRAs of either type is $4,000 for folks under 50 and $5,000 for those 50 and older.