Stiff the IRS for the Next 100 Yearshttp://www.fool.com/investing/ira/2008/05/29/stiff-the-irs-for-the-next-100-years.aspx Dan Caplinger (TMF Galagan)
May 29, 2008
Many investors haven't had access to one of the best ways to save for retirement. In a couple of years, however, everyone will have a chance to give the IRS a century-long vacation from collecting tax on their investments.
Roth IRAs give retirement savers the opportunity to invest money in nearly anything they want without having to pay taxes. Currently, however, those whose adjusted gross income is more than the applicable income limits -- $116,000 for singles and $169,000 for married couples in 2008 -- aren't allowed to contribute to Roth IRAs. An even lower limit -- $100,000 for everyone -- applies to prevent many people from converting traditional IRAs to Roth IRAs.
In 2010, the limit on Roth conversions is slated to go away. Although income limits will still apply to regular contributions, being able to convert money in old 401(k) accounts and traditional IRAs is worth a lot more than depositing a few thousand dollars every year.
Why pay tax now?
Even with the higher tax bill, there are some big advantages to doing a Roth IRA conversion:
It's that last point that's the most powerful. Think about it: You enjoy tax-free growth for the rest of your lifetime. Then, if you leave your Roth IRA to your kids or grandkids, they won't pay income tax, either -- they just have to take withdrawals based on their life expectancy. Depending on how old you and your kids or grandkids are, that can easily add up to 100 years or more of dividends and capital gains -- all tax-free.
To get just a glimpse of how much you can save in taxes, go back 40 years and look at how some well-known stocks have performed since 1968: