retirement

It's Never Too Late for a Roth IRA

The prospect of tax-free income in retirement may be too good to pass up, regardless of your age.

OUR READER Who: Bill Segur, 60Where: Wilmington, N.C.

Question: I've finally paid off my mortgage. What should I do with the extra cash?

Now that they've paid off their home loan early, Bill is wondering how he and his wife, Susan, should use the extra $600 a month. Bill is a registered nurse at a hospital and hopes to retire in a few years. He wants to maximize what he and Susan (also an RN) are socking away while they're still working. So their focus is on adding to their savings kitty.

Bill and Susan, 54, figure they have three options. They can increase their contributions to their 403(b) and 401(k) retirement plans, add more to their established traditional IRAs, or start up Roth IRAs. Bill appreciates the tax advantages of a Roth. Although there is no upfront tax break, all withdrawals, including investment earnings, are tax-free once you are 59 1/2 and the account has been open at least five years.

But Bill wonders whether it makes sense for him and Susan to open Roths at their age. "At this late date in our work experiences, do we start new Roth IRAs or add to our traditional accounts?" he asks. The couple have an adequate emergency savings fund and little debt, so they can comfortably bulk up their retirement assets.

Carlo Panaccione, a financial planner in Redwood City, Cal., says that Bill and Susan should pat themselves on the back for paying off their mortgage and committing to put the money toward savings rather than going on a spending spree. "People always say: "If I have money left at the end of the year, I'll save it,'" says Panaccione. "It never happens." Instead, he says, household budgets simply tend to expand whenever a family has money to spare.

Tax advantages. So, to answer Bill's question directly: It's not too late to start a Roth IRA. Because both Bill and Susan are older than 50 and their joint income is less than $167,000, each of them can contribute the maximum $6,000 (including $1,000 in catch-up contributions) to a Roth in 2010.

No matter how long you maintain the retirement account, the tax benefits of a Roth are simply too good to pass up. When you withdraw money from a 401(k) or a regular IRA, it's taxed at your ordinary income-tax rate. With a Roth, you can withdraw cash in retirement without paying Uncle Sam a penny.

And once Bill and Susan retire, they won't need to tap their Roth IRAs right away, given their modest living expenses, their income from workplace retirement plans and Social Security. Because Roths have no required-minimum-distribution rules, you can leave the investments in place as long as you like. "That money can just sit there and cook," says Larry Rosenthal, a financial planner in Manassas, Va. With income-tax rates likely to rise to offset growing budget deficits, the Roth stands out as an increasingly valuable tax shelter. In other words, it's a good way for the couple to diversify their future tax liability.

Roth accounts could also prove helpful to Bill and Susan's estate planning. They can leave the accounts to their two daughters, who would inherit them tax-free.

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