Roth Redux

Roth IRAs, retirement accounts that let you contribute post-tax earnings that grow tax-free, have never been available to anyone who earns more than $110,000 a year (or to married couples earning more than $150,000). But that's about to change. Thanks to the Tax Increase Prevention and Reconciliation Act, taxpayers at all income levels will be able to convert traditional IRAs to Roth IRAs.

While the change doesn't go into effect until 2010, taxpayers may want to start considering the options now, says Bob D. Scharin, RIA senior tax analyst at Thomson Tax & Accounting in New York City. Typically, the further you are from retirement, the more benefits Roth IRA savings--on which you won't pay a dime of tax as long as you wait until age 59 and a half to make withdrawals--will offer. But because Roth IRAs don't require fund distributions at any certain age, even those close to retirement might benefit from a conversion, provided they have other savings to tap in earlier retirement years.

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"If you plan to pass the account on as part of your estate, converting also has an advantage," says Scharin. "By prepaying the taxes when you make the conversion, you'll ensure that any earnings will be tax-free for your heirs." But don't use the IRA funds themselves to pay those taxes, or you'll trigger a 10 percent early withdrawal penalty. Says Scharin, "You're better off building up your cash reserves so you can foot the tax bill without tapping your IRA savings."