Traditional Versus Roth IRAs

• A Roth IRA is taxed in the opposite manner of a traditional IRA. A Roth IRA is funded with after-tax dollars and withdrawals are tax-free. Like a traditional IRA, the growth in the account is tax-deferred and funds cannot be accessed until age 59 1/2 without incurring a 10 percent penalty. Traditional IRAs can be converted into Roth IRAs and, depending on your current tax bracket and income expectations at retirement, doing so may be prudent tax planning. You should familiarize yourself with the basic rules concerning when and how the conversion can occur.
  
  

Pay Now or Later?

• Since income taxes on a traditional IRA are paid in the future and Roth IRAs are paid in the current year, an interesting tax-planning opportunity arises. No one wants to pay more taxes than necessary and income tax rates are subject to frequent change. For those who believe that taxes will be higher in the future, converting a traditional IRA into a Roth IRA is advisable because the account owner will pay taxes on the account today and not in the future. Either way, the taxes must be paid -- the smart strategy is to pay them in a year with the lowest marginal income tax rates.
  
  

Tax Diversification

• Regardless of what future tax rates might be, it is wise to consider tax diversification. Just as investments should be diversified among different types of holdings, your IRAs should be tax-diversified. Savings should be actively allocated between taxable accounts, IRAs and Roth IRAs. In 2010, converting a traditional IRA to a Roth IRA became easier because income limits on higher-earning taxpayers were lifted. Prior to 2010, the current income limit for Roth IRA conversions was $110,000 for individuals and $160,000 for married taxpayers filing jointly.