Tax Time! Should you contribute to a Roth IRA?

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Thursday, March 31, 2011

Dan Forbes, GoLocalProv Financial Expert

Each year around this time, I get calls from clients looking for guidance about what kind of IRA they should use – a Traditional or a Roth. In 2011, you get three whole extra days to make this decision. Thanks to Emancipation Day in the District of Columbia, the date to make contributions has been bumped from April 15th to April 18th. Here are some things to remember about the Roth:

No Deduction for Roth Contributions

The problem with the Roth IRA – no deduction for tax year 2010. Your account grows tax deferred and your withdrawals at retirement are tax free. So, will your tax rate be higher at retirement than it is today? You don’t have a crystal ball but you may have noticed your city, town, state and/or country is running a small deficit. There’s a decent chance that your income tax rate is going up. That means the Roth deserves your consideration.

Limitations

You are constrained from using an IRA by involvement in a company retirement plan and by “Modified Adjusted Gross Income” (MAGI) limits. If you’re above the MAGI limits and want to sidestep the system, you can contribute to a Non-Deductible IRA and then convert to a Roth. The income limits for conversion have expired.

Total Combined Contribution of $5,000

If you’re eligible, you can contribute a total of $5,000 (for those 50 and under) to either a traditional or Roth. So why not enjoy the best of both worlds? Split your contributions between the two. During retirement, you can figure which account benefits you tax wise. After age 70 ½, you’ll be forced to take Required Minimum Distributions from the Traditional, while the Roth can stay put for as long as you want.

Roth IRA for Education Funding

One of the nicest aspects of the Roth is the ability to withdraw contributions for higher education funding without incurring taxes or penalties. If you have small children, this is another consideration when deciding between the two options.

The IRA decision can be a tough one. We have a rising tax environment. The tax deduction afforded by the Traditional IRA today is nice and money may be tight. But for those people who are able, splitting contributions between both the Roth and the Traditional provides greater flexibility of withdrawal options down the line.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at dforbes@forbesplanning.com
 

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