Roth IRA's in 2010

"If stock market experts were so expert, they would be buying stock, not selling advice."-Norman R. Augustine

In 2010 the law for Roth IRA's changed (for the better). But you ask, what the heck is a Roth IRA?

With a normal IRA you put in "tax-free" money now and pay taxes when you cash it in during retirement. You get a credit on current taxes for the money deposited and will pay taxes on the money invested and all the interest earned at time of withdrawl. Hopefully you'll pay from a lower tax bracket in retirement.

With a Roth IRA you invest money and get no up-front tax credit. You're investing after-tax dollars. But once invested, there are no further taxes (provided you follow the rules and wait until age 59 1/2, have a disability, or are a 1st time home buyer). You can withdraw the money and interest tax free!

This may sound like 6 one day, half-a-dozen the other, but Roth has some clear advantages.

1. You can withdraw the principal (but not the interest) early if you're strapped for cash.

2. You can invest in Roth and have a company 401k at the same time

3. With a normal IRA you must withdrawl by age 70 1/2 or face a 50% penalty. With Roth there is no age limit for required withdrawls.

Bottom Line

So what is the good news for 2010? In prior years there were restrictions on Roth IRA's for anyone earning more than $100,000. Now those restrictions are lifted and anyone can convert a normal IRA to a Roth (by paying the taxes now).

Why convert now? If you're unemployed part of the year, you'll be in a lower tax bracket and will pay less tax during conversion. If the stock market collaspe took a big bite out of your IRA, there will be less money to convert and tax.