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Tax-free retirement?


Financial adviser Rick Schultenover discusses how to distinguish between a Roth IRA and 401k.

Key Points

Q: What can a Roth IRA do for me that a 401k cannot?

From a tax perspective, treatment of a Roth IRA is opposite that given to a 401k. Money goes into a Roth on an after-tax basis and comes out tax-free after age 59½ and after the five-year holding period has been met.

If you are at the beginning of your career and anticipate earning more income in the future than you do today, the Roth can be a great way to diversify your income tax paid (i.e., pay some tax now in an effort to avoid paying potentially higher taxes in the future).

Unfortunately, the IRS limits how much money you can earn to qualify for Roth contributions, and it also limits the amount one can contribute to the account: $5,000 per year for most investors.

For 2009, if you earned less than $105,000 in adjusted gross income (AGI), you qualified for a full contribution to a Roth. If you earned more than $105,000, but less than $120,000, in AGI, you qualified for a partial contribution.

Most single pharmacists do not qualify for full contributions, but if you are married and have a combined AGI of $166,000 or less, you will qualify for a full contribution. The phase-out limit for married tax filers is from $166,000 to $176,000 of AGI.

If you qualified to use a Roth in the past, there's no need to worry. You can still let that money continue to grow tax-free for retirement. If you fall beneath the income limits again in the future, you can make additional contributions at that time.

Keep in mind that you have until April 15 each year to fund your Roth for the previous tax year. For example, if you were below the income limits in 2009 you have until April 15 of this year to get your contribution into the account.

If you do not qualify for a Roth, you are not entirely out of luck. The current tax law states that starting in 2010, any tax filer, regardless of income, can convert qualified accounts such as an IRA to a Roth IRA. By doing this you can pay the income tax on the converted amount, based on current tax rates, in exchange for letting that money grow tax-free. For example, if you converted a $20,000 IRA to a Roth, you would pay income tax on an additional $20,000 of income.

In addition, for conversions in 2010, you can elect to spread the tax liability over the next two years. This can be a great way to diversify your retirement accounts and create a tax-free income stream during your retired years.

Have a professional or personal financial question? Send it to Rick at rick.schultenover@northstarfinancial.com

The information in this article should not be construed as specific investment advice. Consult a reputable adviser for insight into your particular situation.

RICK SCHULTENOVER is a financial adviser, associate vice president, and associate partner with North Star Consultants, Inc., Insurance Products and Services | *CRI Securities, LLC, Securities and Investments, Investment Advisory Services | *Securian Financial Services, Inc., Variable Products and Securities, Investment Advisory Services | North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc. CRI Securities is affiliated with Securian Financial Services.

This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. 139316 D.O.F.U. 02/10

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