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ROTH's Reward

By Dian Vujovich

I’ve always been a fan of Roth IRAs. Even before it was fashionable. My reasoning was based on the fact that to me, paying taxes on my money before it’s invested in a qualified retirement account made a lot of sense particularly when I could withdraw that growing-tax-free money and not have to pay any taxes on it. And, I wouldn’t be penalized for not withdrawing any of booty after age 70 1/2. That’s a win-win to me.

The one downside has always been that Roth IRAs had income eligibility caps: $105,000 for individuals and $160,000 for those filing jointly. That said, things are going to change in a couple of years and if you’re not a fan of Roth IRAs now, get into one.

Why? Because when W’s tax cuts expire in two years, taxes are going to head higher. That means, even without all the debt that was created last year, this year or is to come in the near future—taxes were slated to increase thanks to George’s 8-years in the White House tactics.

Here’s the deal:

•In 2011, the maximum capital gains rate will increase 5 percent from the current level of 15 percent to 20 percent.

•In 2011, dividend income will be taxed as ordinary income instead of at the current 15 percent— or a lesser rate for lower income folks.

•In 2011, our income tax rates are scheduled to go back to levels we saw in President Clinton’s days: that range was between 15 to 39.6 percent. Today the tariff ranges from 10 to 35 percent. (Lest you’ve forgotten, in 1986 the top tax rate was 50 percent.)

Nothing sweet in any of that. And again, all this tax stuff was put into place under W’s reign and written before our current Great Recession.

Going forward, however, there’s good news for those wanting to minimize their retirement tax consequences and want to either open or convert their traditional IRA to a Roth IRA. As you might guess, there are rules to follow. One is a $5000 a year cap on IRA to Roth conversions. Six-thousand dollars if you’re over age 50.

There’s a lot more to understanding the many benefits of Roth IRAs and all sorts of educational info about them on the Web. One recent story can be found at http://tinyurl.com/lkch76.

To read more articles, please visit the column archive.

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