Financial Stewardship

If you've been on the fence about whether to open a Roth IRA, there are plenty of reasons now to tilt towards a Roth, financial advisers say.

First, account values are low. That's bad news, of course, for your overall net worth, but it also means a lower income tax hit when moving money from an IRA into a Roth. Once you've bit the tax bullet and converted to a Roth, your money can grow tax-free. (Any money you put into a Roth has already been taxed, and everything, including earnings, comes out tax free.)

Second, there's a special perk available only next year: If you convert in 2010 you can delay paying taxes for a year, plus take two years to pay the bill. "If you convert in 2010 you don't have to pay any of the taxes until 2011 and 2012," said Christine Fahlund, a senior financial planner with T. Rowe Price.

Third, starting in 2010, the income limit that prevented higher-income savers from converting to a Roth is lifted, thanks to the Tax Increase Prevention and Reconciliation Act of 2005, signed into law in 2006. (Until that rule change goes into effect next year, taxpayers with adjusted gross income higher than $100,000 can't convert to a Roth.) Note: This applies to conversions only; there still will be income limits on contributions to a Roth. See this IRS page for current contribution and conversion rules on Roth IRAs.

Fourth, many people expect income-tax rates to rise in coming years. "It's not a big reach to say that if you look at income tax rates now versus the future, they're probably going to be higher in the future," said Joseph Montanaro, a certified financial planner with USAA, based in San Antonio, Texas. USAA is a financial-services firm for military personnel and their families.
"Combine that with the fact that most of our portfolios have taken a beating," he said, and "you have the opportunity to convert to something that will hopefully rebound in a much more tax-friendly environment in a Roth."

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