The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 78. Convert to Roth?

THE ROTH RETIREMENT ACCOUNT, named for its sponsor, William B. Roth Jr., a U.S. senator from Delaware, has many advantages over traditional Individual Retirement Accounts (IRAs) and 401(k) plans. However, many Americans have not been able to use it because of income limitations. For 2009, eligibility to contribute to a Roth IRA phases out between $105,000 and $120,000 for single filers and $166,000 to $176,000 for those married and filing jointly Further, in 2009, only those taxpayers who earned less than $100,000, either as a single or a couple, same limit, could convert pre-tax IRA money to a Roth. But there is big news in the Roth family for taxpayers. Beginning in 2006, employers were authorized to add an option to 401(k) plans to permit them to take Roth (after-tax) contributions, which allows employees to set aside a much larger amount of after-tax money for retirement. And in 2010, the income ceiling for converting from the traditional to Roth IRA disappears.

The Roth is something of a backwards IRA or 401(k) account. With the Roth, you contribute dollars that have already been taxed, rather than pre-tax dollars. But these dollars will never be taxed again. You can take them out tax-free even before you turn 59½, provided you have been in the plan for five years and you withdraw principal rather than earnings. There is no 10 percent penalty for these early withdrawals.

Equally important, there is no mandatory withdrawal schedule for the Roth. You ...