Investors who have been planning for retirement have often turned to Individual Retirement Accounts as a way to begin saving money for the future when they near the age of retirement. While there are various types of retirement planning opportunities, like 401(k)s and traditional IRAs, there are some who feel that Roth IRAs are one of the more beneficial investment methods one can use to plan for their retirement.
In a recent article on Bankrate.com, it was stated that more investors have been attempting to convert traditional IRAs to a Roth account due to the tax advantages that are currently in place. Obviously, many use Roth IRAs for their retirement planning since all of the earnings, when certain qualifications are met, can be withdrawn tax-free after a certain age.
However, recent restrictions that had stopped investors who had income of $100,000 or more from converting to a Roth account were removed and investors were allowed to defer taxes that they had to pay on these conversions to the 2011 and 2012 tax years. This is obviously brought about a beneficial situation for certain investors who can afford to convert retirement accounts into a Roth IRA as, again, many can simply keep their earnings once they retire without fear of paying taxes.
Yet, advisers have cautioned investors to take a look at their financial situation, factor in their age, and their tax bracket before converting. As an example, someone who may consider converting their traditional IRA to a Roth account will obviously have to pay taxes on the conversion, but if this is done later in life, the investor may lose more money through taxes than they can make by the time they began to withdraw these earnings.
While this case may not be common, advisers do caution investors against converting without weighing all the pros and cons. Many individuals see the draw of a Roth IRA, meaning they are attracted to the opportunity to withdraw earnings tax-free, yet do not consider the fees they must pay to convert these retirement accounts.
Understandably, young investors may be able to convert to a Roth account without much trouble, as they have a longer time frame before they reach the age where they can begin making withdrawals on their IRA or may need money for retirement. However, these new Roth IRA conversion rules do stand to benefit some investors but, again, they are not necessarily for everyone and may not be beneficial for certain individuals and their retirement planning goals.