With a PBS show airing this month, a new book just out, and a nonstop schedule of nationwide appearances, it's not easy to catch up with IRA expert Ed Slott, CPA. (He was named "The Best" source for IRA advice by The Wall Street Journal and "America's IRA Expert" by Mutual Funds Magazine.) Fortunately, Investor's Weekly was able to get some time with Slott to see why he's talking up Roth IRAs.

Slott has always been "a big fan of the Roth IRA," he says, because, for those who are eligible, contributions and any earnings can be withdrawn tax free in retirement.^{1, 2}

"The last thing you want to do is to reach into your account at retirement -- just when you need money the most -- and find out that the government may own a part of it," Slott explains. "With a Roth IRA, in retirement, it's all yours." 

Benefit from today's lower tax rates
Now, with changes in the federal tax brackets in 2009, the Roth IRA may make even more sense for many savers, Slott says. "With the stimulus package, tax rates are historically low right now, as low as they've been since the 1930s, so it's an excellent time to consider investing in a Roth IRA."

More taxpayers will potentially be eligible to invest in a Roth IRA this year due to the new rates, and if they do, they may pay less in upfront taxes on their contributions.³ Slott encourages investors to take advantage of these "sale prices" now, because he believes that the opportunity may be short-lived and tax rates will probably go up, as the government tries to reduce its deficits. 

For the same reason, he says, it may also be an excellent time to convert Traditional IRAs to Roth IRAs. Investors will need to pay taxes on any amounts converted, but they will do so at this year's lower rates.

"Remember, most Traditional IRAs and 401(k)s are loaded with money that is not yet taxed. So the idea in converting to a Roth IRA is to get that tax out by 'buying out' Uncle Sam at the best possible price," Slott says. Today, you're buying him out at a bargain price."

A "double sale" on conversions
Another argument for conversion: The value of many retirement accounts may now be lower due to market declines. "So, as long as you have the money to pay the taxes on the conversion, now may be the time to turn your 401(k) from an old employer or a Traditional IRA into a Roth IRA," suggests Slott. With low values and low rates, "It's a 'double sale' on Roth IRA conversions in 2009," he says.

According to Slott, the best candidates for converting to a Roth IRA are those who can afford to pay the taxes that will be due. Typically these are younger investors whose account values are lower and whose income for now puts them in a lower federal tax bracket. But just about everyone with a Traditional deductible IRA or eligible 401(k) should consider it, he says, because of the long-term benefits of tax-free accumulation and distribution in a Roth account. An exception: those who can't swing it financially -- who don't have the money to pay the taxes because they need that money right now. "Don't spend it if you need to live on it," he cautions.

 See if converting to a Roth IRA makes sense for you.

More good news in 2010
The downside: Not everyone is eligible to convert right now. In tax year 2009, the IRS limits conversions to taxpayers who earn less than $100,000.⁴ But there's good news ahead, Slott reminds: In 2010, the current restrictions are removed, and everybody with earned income will be eligible for a Roth conversion.⁵

In addition, those who convert to a Roth IRA in 2010 will be given two years to pay the taxes on that conversion. "If the current law holds, you won't have to pay entire tax when you convert. You can pay half in 2011 and the balance in 2012," Slott explains.⁵

But what if you change your mind once you convert?

"The great thing about the Roth IRA conversion is that you can change your mind," Slott says, adding that this is the only area of the tax code where you can actually get a "do-over." "Let's say that you converted $100,000 and paid tax on in it 2010 and, right afterwards, the market tanked and you wanted that tax money back. You have until October 15 of the following year to do a Roth 'recharacterization' that will change your account back to an IRA," he explains.⁶

Finally, for those who want to take advantage of the opportunity to convert to a Roth IRA in 2009 or 2010 but don't have the cash to pay the taxes for the full amount, Slott recommends thinking about partial conversions. But whether you do full or partial conversions, he concludes, "the idea is to get the money moved to an account that won't be taxed at retirement because, inevitably, you never know when the federal government and the states will raise taxes."

 Learn more about the tax implications of converting to a Roth IRA.

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1. Anyone with employment compensation can contribute to a Roth IRA, subject to the following income limits. For single filers: up to $101,000 for 2008 and $105,000 for 2009 ($101,000-$116,000 in 2008 and $105,000-$120,000 in 2009 for partial contributions); for joint filers: up to $159,000 for 2008 and $166,000 for 2009 ($159,000-$169,000 in 2008 and $166,000-$176,000 in 2009 for partial contributions). You must be at least 18 years old to open an IRA with Fidelity.

2. A distribution from a Roth IRA is tax free and penalty free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, death, disability, qualified first time home purchase.

3. Unlike Traditional deductible IRAs, contributions to Roth IRAs are made with after-tax dollars and are not federal-tax deductible.

4. If you are married filing jointly or single, your MAGI cannot exceed $100,000 in the year you convert. If you are married filing separately, you are not eligible to convert unless you have lived apart from your spouse for the entire taxable year. Converted amounts are not included in your MAGI when determining eligibility.

5. Starting in 2010, a provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) will allow more people to convert to Roth IRAs by removing the Modified Adjusted Gross Income limitations on conversions from a Traditional IRA to a Roth IRA. Under the provision, you may be able to spread your tax liability on amounts converted in 2010 over tax years 2011 and 2012. Contact your tax advisor to determine if this change makes sense for you.

6. For taxpayers who have timely filed their federal income tax return or extension, the recharacterization deadline is six months after the unextended due date of the return for the year of the conversion or the year for which the contribution was made.