The Roth IRA and Retirement Taxes

roth_ira_taxesI have previously written about the potential benefits of a Roth IRA for retirees. If you currently have a non-Roth IRA, the questions about the benefits of converting are becoming more urgent. This is because of the window of opportunity for conversion to a Roth (without income restrictions) that is opening in 2010.

With all of the government spending going on, we can safely predict that new and higher taxes will be imposed across the board, including on retirees. This means that every retirement planning step you take should be looked at from a tax burden perspective.

The Roth IRA conversion strategy is clearly near the top of the list for retirement tax management.

There are numerous online resources for comparing and assessing Roth eligibility.

Recently, CNN/Money has published a very good slide presentation called “Retire Without Taxes.” This article carefully walks the reader through how to use the Roth IRA to minimize your retirement tax burden.

One of the important points addressed in the presentation is whether Congress could change the rules and start taxing Roth withdrawals made by wealthier retirees. The answer is probably not. However, Congress could do equivalent damage to our retirement tax burdens by either taxing consumption or bumping marginal tax rates for retirees having higher net worth. This type of tax punishment of baby boomers who have actually saved for their retirement is a frightening scenario.

There is one statement that I disagree with in the CNN/Money Roth presentation. The author states that the Roth is only savings plan that gives us the opportunity for tax-free withdrawals in retirement. Actually, there is another plan, and it can be even better than a Roth. If you have a Health Savings Account (HSA), you can use your HSA as a super-Roth investment vehicle. I say “super” Roth because if you use it properly, you won’t pay taxes going in or out of the plan!

Anyway, I recommend careful consideration of the Roth IRA conversion strategy in the next few months because the window won’t be open long. Indeed, if Congress or the White House get nervous about massive amounts being converted early on, they might conspire to close that window early.

Photo credit:  brianjmatis


  1. Brian says

    Doesn’t the ultimate question regarding converting an IRA to a Roth, will the 33% loss of funds that I could invest today, going to be larger than that future tax savings I would receive?

    I have both a Roth and an regular IRA, I think having both make sense, and I think if you have a small IRA you should convert, or if you are adding new $$$ you should put into a IRA…but if you have 10+ years of savings, growth, or 401K money in a IRA, I am very skeptical that taking a heavy hit today, is a good move.

    Especially if you are in a state with income taxes (43 of the 50 do).

    Open to thoughts and continuing the discussion.

    • Mr. GoTo says

      Brian: I think if you run an investment return analysis, you will find that you end up with the same number after taxes with a Roth IRA or conventional IRA, if the tax rates stay the same. So the real question is whether you can effectively Roth withdrawals to lower your overall tax burden when you retire, taking into account other taxable income you will have. If you are certain that your tax burden will be lower when you retire under any circumstances, the Roth is no help.

  2. says

    Excellent point on 2010 Roth IRA conversions. As of now, the window for conversion is open-ended, but if the government thinks it’s losing future revenue, it might change the law.

    On the flip side, given the current decrease in federal tax revenue, the government might welcome early taxation of IRA’s through the conversion process, so it might opt to keep the law unchanged well into the future.

    Either way, if you’re considering a Roth, now’s the time to take advantage!

  3. says

    I think the conversion really depends (much like all personal finance) on the person and their income. For some it’s going to be a great deal, while for others they may get socked with higher taxes if they don’t plan correctly.

    Like Britt mentions, the government is going to enjoy having taxes earlier than normal so I think this may be something that sticks for quite some time.

Leave a Reply

Your email address will not be published. Required fields are marked *