Shakespeare may have asked "to be or not to be" in Hamlet, 3:1, but today, the more pertinent question is "to Roth or not to Roth."
Back in 1997, Congress enacted what became known as the "Roth IRA" after its main supporter, the late Senator William Roth.
With an ordinary IRA, you make tax-deductible contributions to your retirement account. The earnings on the account are tax-deferred. When you take distributions, the entire amount is taxable as ordinary income. You must start taking distributions beginning shortly after you reach age 70. The distributions are taken over your life expectancy.
By contrast, with the Roth IRA, the contributions to the account are not tax-deductible. While this may not seem to be such a great deal, withdrawals from the account are tax-free.
In fact, even the earnings on the account are tax-free, not just tax-deferred. To make things even better, even after you reach age 70, you are not required to start taking distributions like you must from traditional IRAs and other retirement plans.
After your death, the distributions your beneficiaries are required to take each year are the same as with a regular IRA, but they are not taxable even to your beneficiaries.
In order to make a full Roth IRA contribution, you must have income under $95,000 if single or $150,000 if married filing jointly.
There is a phase out of the contribution above that income level and if your income is above $110,000 if single or $160,000 if married filing jointly, no Roth IRA contribution is allowed. Contribution limits are the same for both types of IRAs, $4,000 in 2006 and 2007 and $5,000 thereafter.
Further, if you are age 50 or above, you may make an additional $1,000 "catch up" contribution.
Congress expanded the Roth idea to 401(k) plans. Now, if your employer's plan allows for it, you may designate part of your 401(k) contribution for the year as a "Roth 401(k)" contribution.
The maximum contribution to a 401(k) in 2006 and thereafter is $15,000. If you are age 50 or older, you may make an additional "catch up" contribution of $5,000. These limits apply to both regular and Roth 401(k) plans.
You may convert from a regular IRA to a Roth IRA if you have income below $100,000. In the conversion process, you would pay income tax on the balance of the regular IRA, but then would never pay tax on the converted IRA or its earnings upon withdrawal.
In 2010, there is no income limit for doing conversions to Roth IRAs. This would make Roth IRAs even more attractive to those with higher incomes and greater ability to pay the tax upon conversion.
Even before 2010, you may be able to manipulate your income by moving income and expenses over which you have control.
For example, you could change your investments so that you make less income in a particular year and more income in a subsequent year. In the year of lower income, you would Roth the IRA.
Conversion can be very powerful. For example, let's say you are age 70 and convert your $250,000 IRA to a Roth IRA. Now, rather than having to take distributions that will drain the IRA over your life expectancy, no distributions would be required until after your death.
If you earn 8 percent on the funds and live 18 more years, your assets will increase to $1,000,000.
When your beneficiaries withdraw the assets over their life expectancies, the distributions will be tax-free to them.
A qualified estate-planning attorney can help you plan for your retirement plan assets so that you and your beneficiaries can make the most of them.
Robert J. Kulas is a member of the American Academy of Estate Planning Attorneys and the National Academy of Elder Law Attorneys. He has been engaged in the practice of law in Florida for the last 23 years. For more information or to attend an upcoming seminar, call 398-0720.