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Roth IRAs now available to all

Tax law changes have made everyone eligible to convert a traditional individual retirement account (IRA) to a tax-free Roth IRA beginning in 2010.

Before this year, many higher-income people could not convert to a Roth IRA. But income restrictions have been lifted.

“It’s the best thing since sliced bread,” Edward Jones financial advisor Russ Hamlin said, “because a Roth IRA grows tax free, and it’s going to come out tax free. Anybody can now convert.”

Hamlin explained that Roth IRAs are more flexible than traditional accounts because they do not carry required minimum distributions. Those with traditional IRAs must liquidate, or take money out, when they turn 70 and a half, which creates an annual tax burden.

Of course, conversions to a Roth IRA are taxed. While many cannot afford a full conversion, Hamlin said this can be done annually in small increments.

“You can incrementally start taking a little out. A Roth IRA is not taxed, and you never have to take money out,” he said.

For those who choose to convert, income tax liability is based on the income tax bracket into which a person falls.

“If you think taxes are going to go up, converting makes sense,” Hamlin said.

On the other hand, someone who feels that tax rates will be lower at retirement may not wish to convert. Others may not be concerned about leaving an IRA to their heirs.

Hamlin advises people to consider that tax rates are currently at historic lows.

“Although you may be in a lower tax bracket, your tax bill is likely going to be higher (at retirement),” he said.

A Roth IRA may also be used for estate purposes. Anyone who inherits an account must take money out, but this money is not taxed.

Hamlin also pointed out that earned income is a requirement for contributing to a Roth IRA.

Anyone with questions should consult a financial advisor.