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Unstable markets could pay off for Roth investors

November 5, 2008 by  

A Roth IRA could help guard your wealthOngoing instability in the stock market may offer a silver lining to those saving for retirement.

Some financial observers suggest switching from a traditional retirement account to a Roth IRA now because so many stock portfolios have posted significant drops.

This presents a potentially lower tax burden to those who switch. Assuming those portfolios return to their previous levels over time, some investors could realize considerable financial gains.

Writing on ABCnews.com, financial columnist David McPherson offers another reason to convert now to a Roth IRA.

"Twenty years from now, federal income taxes are going to be higher than they are today," he predicts, citing unchecked federal deficits and the pending retirement of the Baby Boom generation.

McPherson, converting now to a Roth IRA would amount to "paying lower taxes now than at higher rates later."

A Roth IRA works differently from a traditional IRA in that it does not tax an individual’s savings upon retirement. Traditional IRAs offer tax breaks as money is placed into an account, but then income tax is collected on those earnings at retirement.

According to the IRS website, workers can invest up to $5,000 a year in a Roth IRA, or $6,000 if they are over age 50. Roth contributions are not reported on one’s tax return. ADNFCR-1961-ID-18861478-ADNFCR

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