Roth option increasing in popularity. The $100,000 income limit for converting a traditional IRA to a Roth IRA was eliminated in 2010. Since then, there has been a surge in Roth IRA conversions. Many financial institutions, including Fidelity Investments, Vanguard, and Bank of America, reported four- and five-fold increases in the number of Roth IRA conversions executed in 2010. Vanguard, for example, completed more than 170,000 Roth conversions from the beginning of 2010 through December 16, up 550 percent from 2009. Retirement savers must pay income tax on the amount converted from a traditional IRA to a Roth IRA, but withdrawals will be tax-free in retirement. "You are paying upfront to remove the uncertainty of what future tax rates will do to your savings," says IRA expert Ed Slott, founder of irahelp.com and author of Stay Rich for Life!: Growing & Protecting Your Money in Turbulent Times.
Withdrawals are required. You cannot shield money from taxes in a traditional IRA indefinitely. Distributions become required after age 70½. Those who fail to withdraw the correct amount must pay a 50-percent excise tax on the amount not distributed as required. You must take your first required distribution from your IRA by April 1 of the year after you reach age 70½. But in subsequent years, annual distributions are required by December 31. If you delay your first distribution until April, you will need to take two withdrawals in the same year, which could impact your income-tax rate. "For some people, two in the same year might be enough to throw them into a higher tax bracket," says Hultstrom. Withdrawals from Roth IRAs are not required in retirement.
Costs matter. Retirement savers using IRAs sometimes pay higher fees than those with a 401(k) because individuals no longer have the group's bargaining power to obtain lower-cost investment products and tend to make high-cost investment choices, according to a 2009 Government Accountability Office report. Pay attention to the fees and costs of each investment option and switch into similar low-cost investments when possible. "A 1-percent difference in fees over a lifetime makes a really big difference," says Slott.
Special perks for high and low income savers. Retirement savers age 70½ or older who are in the fortunate position of not needing the money in their IRA can avoid paying income tax on their required minimum distribution of up to $100,000 by donating it to a charity by Dec. 31, 2011. To qualify for the tax exemption, the IRA trustee must make the distribution directly to a qualified charity. Low-income workers who save for retirement may be able to claim a tax credit. If your modified adjusted gross income is less than $28,250 ($56,500 for couples) in 2011 and you contribute to an IRA or 401(k), you may be able to claim the saver's credit. This nonrefundable credit is worth up to $1,000 for individuals and $2,000 for couples.