Will New Rules Make You a Roth Convert?

Physician's Money Digest, April15 2005, Volume 12, Issue 7

Will you need the required withdrawalsfrom an IRA to cover living expensesonce you retire? If the answer is no, youmight be interested in a new rule passedby the IRS that makes it easier for traditional IRA ownersto convert to a Roth IRA and thereby avoid distributionsaltogether. The rule states that individuals whohave reached age 701/2 and are already taking requiredminimum distributions from a traditional IRA no longerhave to include that money as part of their modifiedadjusted gross income (MAGI). Why is this significant?Excluding IRA income from MAGI enhances the likelihoodthat more retirees will meet the $100,000 eligibilitythreshold for converting to a Roth IRA.

This rule may be of interest to people in their 70s andolder who don't need the IRA income and who'd preferleaving the money to grow tax-deferred for the benefit oftheir heirs rather than dragging it down throughrequired minimum distributions. Keep in mind, however,that one of the bigger drawbacks to converting froma regular IRA to a Roth IRA is the upfront tax paymentthat will be due on the money being converted. If youlike the idea of no required minimum distributions, besure you understand how the Roth IRA and a Roth conversionmight affect you.

Rules of the Roth

Contributions and eligibility. As with traditional IRAs,contributions to a Roth IRA are limited to $4000 in2005, up from $3000 in 2004. Older Americans areallowed to make so-called catchup contributions of $500this year. Contribution limits will increase to $5000 in2008, after which they will be adjusted for inflation.

Unlike traditional IRAs, there are income restrictionsimposed on the Roth IRA that limit an individual's eligibility.For instance, contribution limits begin to declineor phase out for single taxpayers with adjusted grossincomes (AGIs) of more than $95,000 a year and formarried couples filing jointly with AGIs of more than$150,000. Individuals with AGIs in excess of $110,000($160,000 for married couples filing jointly) are not eligibleto invest in a Roth IRA, nor are married coupleswho file taxes separately.

Distributions. As mentioned above, one of the keyadvantages of the Roth IRA is that it does not require theaccount owner to take distributions during their lifetime.In addition, individuals can continue to make contributionsto a Roth IRA beyond age 701/2 as long as theyhave earned income. Another major benefit of the RothIRA is that distributions taken by the owner, or theowner's beneficiaries, are generally tax-free if the ownerhas held the account for at least 5 years and meets certainother requirements.

General Considerations

Putting the "to convert or not to convert"debateaside, the following are some general factors to considerbefore determining which IRA—the traditional orRoth—makes more sense for you:

•A Roth IRA may be more attractive the furtheryou are from retirement. Why? Because the longer yourearnings can grow, the more income you may have thatis never taxed.

•If your regular IRA contributions are nondeductible,you may be better off with a Roth IRA. That'sbecause the distributions of earnings from your regular,nondeductible IRA will eventually be taxed; the qualifieddistributions from a Roth IRA will not.

•Your current and future tax brackets will affectwhich IRA is best for you. For example, if you are currentlyin a high tax bracket and expect to be in a muchlower tax bracket during retirement, a regular IRA couldbe the best option. Why? Because you may be able toclaim a deduction on your contributions now and thenpay taxes on future distributions at the lower rate later.Keep in mind that some experts say you could still comeout ahead with a Roth IRA if you can fund it for at least12 or 15 years before retirement.


As you can see, there is no easy answer to the question,"Which IRA is best for me?"As with any majorfinancial decision, careful consultation with your taxand financial advisors is a good idea before you makeyour choice. In addition to helping you with calculationsand projections, your advisors are likely to understandhow tax law changes may affect your retirement investments.Your retirement could last 20 yearsor more. How you live tomorrow could depend on thechoices you make today.

is the president of Apollonia

Financial Services in Elkins Park, Pa. All securities

offered through Linsco/Private Ledger, member

SIPC. Past performance is no guarantee of future

results. The information presented is the opinion

of the author and not Linsco/Private Ledger. Mr.

Kleiman welcomes questions or comments at 800-

242-1760 or info@apolloniafs.com. This article is not intended to provide

specific advice or recommendations for any individual. Consult

with your financial advisor if you have questions.

Scott J. Kleiman