Saving for retirement can be easier with the right IRA
By Michelle Singletary
Retiring these days is complicated. There are a lot of issues to figure out.
To help people answer some of the concerns and questions about retirement, I hosted an online discussion recently with Jan Cullinane, co-author of "The New Retirement: The Ultimate Guide to the Rest of Your Life."
Time ran out but Cullinane agreed to answer additional questions. Here are some:
Q: I am 48 years old and have most of my retirement savings in traditional IRAs. Should I consider transferring these funds to a Roth IRA?
Michelle: Just so you know, there are two types of IRAs, traditional and Roth. Contributions to a traditional IRA may be deductible depending on your income and whether you participate in an employer-sponsored retirement plan. Roth IRA contributions are not deductible but retirement distributions are not taxed.
Cullinane: The ability to compound earnings over a number of years and then distribute those earnings tax free using a Roth IRA is a powerful device for accumulating retirement savings. The downside to converting a regular IRA to a Roth IRA is that you will be taxed on the amount converted in the year of conversion.
Holders of a regular IRA can convert it to a Roth IRA as long as their modified adjusted gross income does not exceed $100,000 (either joint or single, but not married filing separately). However, the amount converted is fully taxable that year.
The decision to convert is based on a comparison of the cost of paying the tax now with the benefit of receiving tax-free distributions after retirement — which involves the number of years the funds will grow in the Roth IRA before they are distributed, the rate of earnings on the invested funds and the expected tax rate in retirement compared to the tax rate on the conversion today. In general, the longer it is until your retirement distributions start, the more likely it is that a conversion makes sense. Since you are only 48, the odds are that it would make sense to convert to a Roth IRA, particularly if you expect your tax rate in retirement to be comparable to your current tax rate.
Q: What are the relative merits of investing in a traditional IRA versus a Roth IRA?
Cullinane: To see which one could be better for you, check out the calculator at www.finance.cch.com (click on "Financial Calculators" then scroll down to "Roth vs. Traditional IRA"). This site allows you to enter your information (current age, age of retirement, tax rate, annual contribution, etc.) and compare how much money you'll have in retirement both pre- and post-tax with both a Roth and traditional IRA.
Q: Is there a source where you can look up the average income needed to live a middle-class lifestyle in various communities?
Cullinane: Try www.homefair.com (click on "cost-of-living comparison"). It allows you to see how far your income will go in various cities. For example, if you live in Arlington, Va., and have $50,000 in annual expenses then move to Fairhope, Ala., you would only need $33,062 to have a comparable lifestyle.
Q: Assuming you are still working part-time and do not need the money, are there any online calculators that help decide when to take Social Security benefits?
Cullinane: The Social Security Administration has three versions of online calculators to help you make a decision. You can see your benefits in present-day or future dollars. Go to www.ssa.gov (click on "Calculate your benefits").
Q: Did the Roth IRA contribution ceiling increase this year?
Cullinane: The maximum annual contribution for a Roth IRA in 2004 was $3,000. This limit increases to $4,000 for 2005 through 2007, and then to $5,000 for 2008. In addition, individuals age 50 or older by the end of the tax year are permitted to make an additional catch-up contribution of $500 for 2004 and 2005, and $1,000 for tax years 2006 and later.
Michelle Singletary writes for the Washington Post.
