IRAs: Is it better to pay taxes now or later? - Ahwatukee Foothills News: Business

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IRAs: Is it better to pay taxes now or later?

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Posted: Wednesday, September 10, 2008 11:00 pm

Those with a Traditional IRA who would rather have a Roth IRA will get a unique opportunity to switch in 2010.

Although there has always been the ability to switch, there were several limitations.

Because contributions to the Traditional IRA are made with pre-tax dollars, taxes will be due on any amount converted to a Roth IRA (which then grow tax-free), and the converted amount will also show up on your tax return as income.

While tax-free investments might sound exciting, investors ran into a small hitch.

In the past, those with an annual income of more than $100,000 were not allowed to convert, and they had to pay the income taxes on it within the year of conversion.

"If a guy wanted to convert $100,000 to his Roth IRA, suddenly it's not so exciting anymore," Stan Reynolds of Arizona's IRA Advisor said. "The guy just couldn't bring himself to pull the trigger."

But, beginning Jan. 1, 2010, Congress will put the Tax Increase Prevention and Reconciliation Act into effect. The income limitations will be lifted, and the extra income will be split between the 2011 and 2012 tax returns. This gives investors a chance to prepare and brace themselves for a big tax hit now to avoid paying taxes in the future, if they wanted.

Reynolds said investors have five years before the taxes on their Traditional IRA conversion comes due, and if they plan correctly, it can be affordable to do so.

"Say this conversion will cost me $30,000," Reynolds said. "If I set aside $6,000 over the next five years, now I have $100,000 growing tax-free."

For more information, call Stan Reynolds at (602) 867-7977 or e-mail him at stan@afa.cc.

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