Roth IRA Complicated, Not for Everyone
Veigle, Anne, The Washington Times (Washington, DC)
Now that the year is more than half over, it's a good time to consider whether converting an individual retirement account to a Roth IRA is a good idea.
The Roth IRA, which allows contributions to accumulate tax-free forever, rolled out in January to a roar of excitement from taxpayers eager to welcome a new tax shelter. But a closer look at the Roth reveals some scratches and dents.
"I think the Roth got a lot more fanfare than it really merited," says Martin Nissenbaum, a tax partner with Ernst & Young in New York. The initial rush to open new accounts and transfer existing IRAs has slowed as people begin considering the complex rules associated with the investment.
For one thing, the tax bite could be sizable when a regular IRA is rolled over into a Roth IRA, if the account has accumulated more than a few thousand dollars. Although the government will allow taxpayers to spread payment of these taxes over four years - providing the conversion takes place before Jan. 1, 1999 - the bottom line is still the same.
The four-year installment plan takes some of the sting out of writing Uncle Sam one big check. Some people also figure they can pay the taxes out of money withdrawn from the IRA for rollover purposes.
Bad idea, scold most financial planners. The purpose of opening an IRA is to save for retirement. So even if the Roth looks good, it makes no sense to use hard-earned retirement savings to pay taxes.
"The key is whether you have the ability to pay the taxes," says James E. Pearman Jr., a fee-only financial planner in Roanoke. "You have to have the assets, otherwise it may really not be practical."
Tax brackets are another thing to consider when mulling over a Roth IRA. Taxpayers at the high end of the salary scale will pay more taxes than someone earning minimum wage. People who are close to retirement - and who expect that their retirement income will be lower than their current salary - are better off waiting until their income drops before rolling money into a Roth IRA.
On the other hand, a young person who expects salary growth in the future might want to convert an ordinary IRA to a Roth to capture the tax-free benefits down the road. And those who have only small investments in their IRAs may also benefit from making the conversion - no matter what their salary situation is.
One of the most popular reasons for converting to a Roth IRA is estate planning - particularly for high-income people. Because the government does not require Roth IRA account holders to make any withdrawals, the proceeds may be passed on to an heir tax-free. The amount in the account would be included in estimating the value of the estate, but the beneficiary would have the full use of the money.
"For estate planning, we find the Roth an attractive tool," Mr. …