Roth: Four Little Letters Leading to Long-Term Financial Security

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Roth IRAs and their more recent cousins, the Roth 401(k) and Roth 403(b), offer outstanding retirement and estate planning opportunities to most readers who qualify. Further, the chance to benefit from a Roth account does not end with employment, as Roth IRA conversions are favorable for many retirees.  If you have been unsure about using a Roth plan, read on and discover how a Roth retirement plan can help provide you and your family with long-term financial security.  After all, retirement income planning has become one of the biggest issues currently facing Americans as the first of the baby boomer generation achieves retirement age.         

Roth IRA Contributions - Rules and Recommendations

In most cases, we recommend that you make a $4,000 Roth IRA contribution for yourself and (if applicable) a $4,000 contribution for your spouse for 2007. If either you or your spouse is over age 50, these amounts are increased to $5,000. In 2008, these amounts increase to $5,000 and $6,000 if over age 50. For subsequent years, these amounts will be indexed for inflation in $500 increments.

According to Roth IRA rules, to qualify for the maximum contribution, married taxpayers filing a joint return must have a 2007 combined Adjusted Gross Income (AGI) of less than $156,000 and your earned income must be at least as much as the amount you want to contribute to the Roth IRA.  For singles, you must have an AGI of less than $99,000 and an earned income of an amount at least equal to the contribution amount. For subsequent years, these amounts are increased for inflation in $1,000 increments.

If you are wealthy and have qualifying children or grandchildren (i.e., the children are earning at least  $4,000), please consider giving any eligible child or grandchild a gift of $4,000-with the stipulation that he or she should put the money into a  Roth IRA for themselves. 

Why is a Roth IRA Better than a Regular IRA?

Roth IRAs, with a few exceptions, grow income-tax free and owners are not required to begin taking minimum distributions at age 70½. Your Roth IRA can continue to grow tax-free for as long as you own it.

Regular IRAs grow tax-deferred, and both the original investment and the growth will be taxed when the money is withdrawn.

The disadvantage of the Roth IRA is that you do not receive a tax deduction when you make a contribution.  In effect, Congress is taxing the seed (your contribution), but you reap the harvest (your withdrawals) tax free. In contrast, with a traditional IRA, you are not taxed on the seed, but your harvest is taxed.

The exception to our preference for the Roth over the regular IRA would be when you can anticipate that your income tax bracket will be lower later.  However, even with a lower tax brackets in retirement, the Roth IRA can still be a better choice unless a short investment period is anticipated. 

Roth IRA Conversion

If your modified adjusted gross income (MAGI) is less than $100,000 and you are retired, please give serious consideration to converting at least a portion of your current regular IRA to a Roth IRA.  For most clients who qualify, we generally recommend a partial conversion.  Making the conversion does require paying taxes on the converted amount to the extent it produces taxable income.  But, even taking that tax payment into account, the conversion provides a dramatic increase in long-term benefits to your family. 

In year 2010 and beyond, this $100,000 MAGI limitation is scheduled to be eliminated. At that time, everyone should consider the Roth IRA conversion in the interest of improving the long-term family finances.How much better off are you? In the simple example graphed below, if you convert $100,000 today, then in 20 years, you are $51,227 ahead (using reasonable assumptions too lengthy to list).

When you should Convert IRA

But, then please consider this scenario: what if you die 20 years after you make the conversion and you opt to leave the Roth IRA to your 45-year-old child? How much better off is your child?  $1,562,742.  To be fair, that is in future dollars.  The present value of the benefit to your child or children in today's dollars is $265,249 adjusted for 3% inflation. 

Roth IRA Advantage to Child Beneficiary

What if the Tax Rates Go Up? 

You will be ecstatic that you made the conversion.  The math easily supports that statement. 

What if We Abolish the Income Tax?Oops, your hot air balloon will be deflated.  You would have paid income tax for nothing. 

Estate Planning for Roth and Regular IRAs

While conducting your estate planning, please keep in mind that it is not your will or living trust that establishes who will inherit your IRAs, Roth IRAs and retirement plans. Those determinations are controlled by the beneficiary designations that you have chosen for each of these specific plans. Many readers have complicated wills, but they make the mistake of not doing the same depth of planning when specifying their IRA and retirement plan beneficiaries. IRA owners and retirement plan participants should consider whether they need sophisticated IRA and retirement plan beneficiary designations, in addition to sophisticated wills or living trusts. An integrated tax-savvy approach including wills, trusts and retirement plan beneficiary designations will dramatically increase the amount of the funds retained by the family.  

Where to Go From Here

Retirement income planning is an issue that affects nearly everyone.  I recommend that all IRA owners take the next step and read The Value of a Roth in an EstateGo to to receive this report for free. Discover the wealth-building power of a Roth IRA.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financia PlanningKiplinger's Retirement Report and The Tax Adviser.  For more informaiton please visit

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