- The Washington Times - Friday, May 26, 2006

Dan McGroarty says the new tax-cut law President Bush signed last week “opens a door for me.”

It would allow households with annual earnings over $100,000 to switch their traditional individual retirement accounts (IRA) to Roth IRAs beginning in 2010, which means they would not pay taxes on the money when they withdraw it during retirement.

Before the new law, only households with income less than $100,000 were given the option to switch.

Mr. McGroarty, 48, a principal in a Chevy Chase public policy consulting firm, is looking for the best way to invest his retirement nest egg, but also is concerned about a wrong move.

“I’m definitely going to work through with my financial planner the pros and cons,” he said. “It’s extraordinarily complicated to puzzle this through.”

The Tax Increase Prevention and Reconciliation Act of 2005 creates incentives for billions of dollars in savings to be transferred to Roth individual retirement accounts.

Sixteen percent of U.S. households earn at least $100,000, according to a 2004 census report.

Roth IRAs are popular not only because they allow investors to avoid paying taxes on the earnings when the money is withdrawn but also because they are not required to take minimum distributions at age 70, as they would be with traditional IRAs.

However, financial planners say one size does not fit all for IRAs, meaning investors need to consider which type of IRA is best for them.

Traditional IRAs allow investors to avoid paying taxes on their IRA contributions when they pay into the fund. Roth IRAs allow no tax deduction when a contribution is made.

The Roth IRAs would be best when taxes are low, such as now, according to financial planners. They might not be the best option when taxes are high.

Investors who switch their funds to a Roth IRA must pay taxes on the amount they convert from the traditional IRA.

“When considering whether to convert to a Roth, investors should determine whether they can pay the taxes from the conversion from a nonretirement bucket,” said Deborah Pont, Fidelity Investments spokeswoman. “Otherwise, they will eliminate any potential advantage of the conversion.”

Self-employed workers could participate by transferring funds first from a qualified retirement plan, such as a 401(k), into a traditional IRA. Afterward, they could roll over the traditional IRA into a Roth IRA.

The new tax law also provides a means for wealthy investors to prepare now for a rollover into Roth IRA accounts.

Under current law, married taxpayers earning more than $160,000 in adjusted gross income and singles earning more than $110,000 cannot invest in Roth IRAs.

However, they can contribute the maximum amount allowed into traditional IRAs, then convert them to Roth IRAs beginning in 2010.

Maximum contributions for traditional IRAs are $4,000, or $5,000 for investors at least 50 years old.

Roth IRA provisions in the new tax law are projected to generate $6.4 billion in tax revenue over 10 years.

“With close to $4 trillion currently invested in IRAs and another trillion being rolled into IRAs before 2010, we could see a large shift of retirement assets to Roths starting in 2010,” Miss Pont said.

The law also gives investors considering a switch in IRAs another choice to make in retirement accounts, which financial planners say is one of the best things that could happen to their industry.

“The disadvantage is that the change adds just one more decision to be made,” said Kyle Selberg, director of retirement and investor services for Principal Financial Group. “We believe the added choice will increase the demand for advisers who specialize in IRA rollovers. The wrong move can cost an investor thousands of dollars, or in a worst-case scenario, their life savings.”

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