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Individual Retirement Accounts Traditional vs. Roth IRAs Should you convert in 2010?

This article discusses the differences between traditional and Roth IRAs and explores whether it is beneficial to convert a traditional IRA to a Roth IRA in 2010. It provides information on investment options, contribution limits, tax advantages, and the potential impact on retirement savings. The article also highlights the importance of planning for health expenses and longevity in retirement.

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Individual Retirement Accounts Traditional vs. Roth IRAs Should you convert in 2010?

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  1. Individual Retirement AccountsTraditional vs. Roth IRAsShould you convert in 2010? Financial Planning for Women November 11, 2009 Jean Lown Ph.D. & Diana Burk, M.S. student

  2. New Developments @ FPW • Survey has been approved by USU IRB • You will receive an email inviting you to respond • Incentives: drawing for free consultation with Suzanne Dalebout at Polaris Financial Planning in SLC • Thanks to Diana FPW newsletter has a new look • FPW has a blog! http://fpwusu.blogspot.com/ • Find us on Facebook: Become a fan of FPW

  3. Overview • Why you may need to invest more • IRA overview • Traditional vs. Roth • Should you convert a traditional IRA or a workplace plan to a Roth?

  4. Life expectancy in the West U.S. Census Bureau, Steve Baker The Salt Lake Tribune August 3, 2006 A6 Calculate your longevity: Module 1B http://www.ces.purdue.edu/retirement/

  5. Source: National Center for Health Statistics, Vital Statistics of the United States, Decennial Life Tables; Governor’s Office of Planning and Budget, Steve Baker/ The Salt Lake Tribune, August 3, 2006 A6

  6. National Retirement Risk IndexCenter for Retirement Research @ Boston College • NRRI measures % of households who are ‘at risk’ of being unable to maintain pre-retirement level of living in retirement • 2004 NRRI: 43% at risk • After crash: households ‘at risk’ rose to 51%

  7. Health Expenses • have risen faster than inflation for > 20 years • Medicare will not cover all costs • 2009 Medicare part B $96.40/mo. • will continue to rise • a women retiring at age 65 in 2009 will need $98,000–$242,000 in savings to cover health insurance premiums & out-of-pocket expenses in retirement for a 50–50 chance of having enough money. • $164,000–$450,000 for a 90% chance • Source: Employee Benefit Research Institute

  8. Long Term Care Expenses • Home health care aides • $21/hour x 24 hours = $504/day x 365 = $183,960 • Assisted living • $37,572 annually • 40% of today’s seniors will spend time in nursing home • $79,935 /yr. for private room • $72,270 for semi-private • The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, October 2009. http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf

  9. Will you have enough $? • to increase likelihood you won’t outlive your $ • to supplement Social Security & any workplace plan • Contribute to an Individual Retirement Account

  10. Investing in an IRA is the first step to reaching your retirement dreams!

  11. What is an IRA? • an individual, tax-sheltered account for retirement • not an investment, but an account to hold investments • like a cookie jar or a candy wrapper

  12. IRA Investments • almost any investment, from CDs to stocks • Good choice is a target date retirement mutual fund • Recommendations at: http://www.usu.edu/fpw

  13. Individual Retirement Accounts • Tax-advantaged investing • account is not taxed while it is growing • When $ is withdrawn in retirement • Traditional IRA withdrawals are taxed • Roth IRA withdrawals are tax-free • Because you paid taxes before funding the Roth IRA

  14. Why Contribute? • How long do you expect to live in retirement? • Do you participate in an employer plan? • Will you have enough money from Social Security & employer plan to last for 3+ decades in retirement?

  15. Who Can Contribute? • Any worker with earned income (no age limit) • Spousal IRA for worker's non-earning spouse

  16. How Much Can You Contribute? • Up to $5000 annually • Start with as little as $100 in Schwab index mutual fund • $50/month in T. Rowe Price mutual funds • Age 50 or older: $6000/year

  17. Traditional IRA • Individual account • You or spouse must be earning taxable income • Contributions are tax deductible • Growth is taxed when you withdraw • Required Minimum Distributions after 70 ½

  18. Roth IRA • Eligibility to contribute in 2009 • Earn <$116,000/year if single • $169,000 for joint filers • Contributions are not tax deductible • Withdrawals are tax-free after age 59 ½ • No Minimum Distribution Requirements • No mandatory withdrawals • Great tax break for wealthy to pass $ to heirs

  19. Traditional vs. Roth IRA • Contributions may be tax-deductible • Depends on income & employer plan • $ is taxed when withdrawn at retirement • Must start withdrawals at 70 ½ Contributions are not tax-deductible $ is not taxed when withdrawn at retirement No mandatory withdrawals at 70 ½ Can bequeath $ to heirs

  20. Questions on IRAs? • It’s not magic!

  21. Should you convert a traditional IRA &/or workplace plan to a Roth in 2010? Compiled from: It’s Your Turn CFP Board eNewsletter, November 2008 • http://www.cfp.net/enewsletter/November2008.html#1

  22. January 1, 2010 • Prior to 1/1/10 only individuals with a modified adjusted gross income of <$100,000 could convert a traditional IRA to a Roth • As of 1/1/10 anyone with a Traditional IRA can convert to a Roth IRA • Whenever you convert from traditional to Roth you owe taxes • If you convert in 2010 you can spread the tax burden over 2 tax years: 2011 and 2012 • Future years: pay all tax in one year

  23. Convert IRA & Workplace Assets • Starting in 2010, you can convert Traditional IRAs and eligible workplace plan account assets to Roth IRAs, and for 2010 conversions only, spread the tax cost of the conversion over two years.” • Traditional IRAs (including Rollover IRAs), SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs are all eligible to be converted to a Roth IRA

  24. Convert workplace plan, cont. • Employer-sponsored plans , i.e., 401(k) or 403(b) plan • that are eligible for distribution and rollover may be converted • for example, when you are no longer working for the company sponsoring the plan

  25. To Switch or Not To Switch?3 Factors to Consider • Marginal tax rate: highest rate at which your income is taxed • Life expectancy • Can I afford to pay the taxes on amount converted from non-IRA funds?

  26. Taxes in Retirement • All your 401(k), 403(b), 457 defined contribution plan funds will be taxable when you withdraw $ • Defined benefit pensions will be taxable • Up to ½ of Social Security benefits will be taxable if • Married, joint, income of $32,000 or more • Single w/ income of $25,000+ • These $ amounts of SS are NOT indexed to inflation • Most middle & all upper income retirees will owe income taxes on SS benefits

  27. Future Tax Rates? • How many think tax rates will be lower in future? • Massive federal deficits = higher taxes • What is your Marginal Tax Bracket? • Highest rate at which your income is taxed • 10%, 15%, 25%, 28%, 33%, or 35% • http://www.rce.rutgers.edu/money/taxinfo/marginaltaxbrackets2009.asp

  28. Marginal Tax Rates • Married filing jointly • Taxable income $16,701 to $67,900 • 15% marginal tax rate • Owe $15 on every $100 in this range • Income of $67,901 to $137,050 • 25% MTR • Owe $25 on every $100 • If you need $75,000 to live on… wouldn’t it be nice to take the $7,100 from your Roth & pay $0 tax rather than pay .25 x $7,100 = $1,775 in federal income taxes?

  29. Should I Convert? • Paying Uncle Sam • If you decide to convert a traditional (untaxed) IRA to a Roth IRA, whatever funds you convert will be taxed at your MTR • If you have “other money” to pay the tax bill, then all of your IRA funds will continue to grow. • If you’re under 59 ½, you can’t use the money in your Traditional IRA without incurring a penalty in addition to paying the conversion taxes • Don’t use IRA $ to pay conversion taxes!

  30. Example 1 • $10,000 in a traditional (untaxed) IRA • If marginal tax rate is 15% • owe $1,500 in federal income taxes • You can spread the tax over 2 years • Pay ½ in 2011; ½ in 2012 • Aren’t you glad the value of your IRA shrunk with the market crash?  • Convert in January 2010 before market rebounds further • If you wait, the value will increase & you’ll owe more taxes

  31. Example 2 • Your traditional IRA is worth $50,000 • You can’t afford to pay all those taxes, even spread over 2 years • OR, if you convert a large amount, the additional taxable income will push you into a higher tax bracket • i.e. from 15% to 25% • Convert a portion of your traditional IRA to a Roth • It’s not an all or nothing deal

  32. Why convert in 2010? • Spread tax payment over two years rather than one year • Only in 2010 • Conversions after2010 • Pay all tax due in one year • Value of traditional IRA may rebound • Convert while value is low

  33. Questions? • For more details on tax implications of a Roth conversion, consult your financial advisor or accountant • Mutual fund websites • Fidelity, Vanguard, T. Rowe Price, TIAA-CREF

  34. Financial Planning for Women • Please respond to FPW survey! • December- No program • HAPPY HOLIDAYS!!! • January 13, 2010 • Bring a friend

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