A couple weeks ago at lunch, Mr. Amling convinced me to convert my traditional IRA (Individual Retirement Account) to a Roth IRA. Tantalizing table talk, no? Somewhere between the chicken salad, Apple rumors, and impending State of the Union predictions, we managed to fit in a little IRA business. Next time we’ll invite you.
My first question was: who is Roth and why does he get his own account? Meet William Victor “Bill” Roth, Jr., former Senator from the great state of Delaware, WWII Veteran, and chief legislative sponsor of the IRA that bears his name. Not bad after 30 years in the U.S. Senate.
My second question was: do I really have to fill out more paperwork? Only a little and it is worth it. Here’s why:
1. Uncle Sam (and Senator Roth’s colleagues) are going to get your tax dollars one way or another. In a traditional IRA, you deposit pre-tax dollars and get taxed when you withdraw money for retirement. In a Roth IRA, you pay your taxes now and take the money out free and clear in your rockin’ old age. And for all of us with grand financial ambitions, our hope is that we will be worth more and in a higher tax bracket when we hit retirement. So why pay taxes later when it will cost more?
2. Also, everyone who thinks that state or federal taxes might go up in the next forty years, raise your hand. Exactly.
3. Plus, all that money you are contributing to your IRA should be earning you more money, right? (Last year is a bad example.) With a traditional IRA, you’ll have to pay taxes on those gains once you retire. On the other hand, a Roth IRA does not tax your earnings. Thank you Senator.
There is a catch – there always is. When you convert from a traditional to a Roth IRA, you will have to pay income taxes on the money in your account. It hasn’t been taxed yet, it won’t be taxed later, so right now looks pretty good. Fair, yet sad. However, according to Mr. Amling, 2010 is the perfect year to do it. You won’t have to pay those taxes this year and your friendly neighborhood IRS will spread the pain out over 2011 and 2012.
It turned out to be a very smart sandwich.
