2. Executing a 2010 Roth IRA "Jump-Start" Strategy
Those ineligible to make Roth IRA annual contributions may want to jump-start a Roth IRA by making nondeductible traditional IRA contributions now in 2009, and converting to the Roth IRA in 2010 when a law change removes the current $100,000 compensation limit for conversion eligibility. An individual's tax impact from a conversion will vary depending on the amount converted and depending on the proportions of earnings and contributions involved (both nondeductible and deductible). For a converted amount, the greater the portion of nondeductible contributions, the lower the tax hit. But the IRS will allow those who convert in 2010 to pay any federal income taxes owed on the conversions during 2011 and 2012.
3. Contributing to a Roth 401(k)
Like IRAs, 401(k) plans may also contain a qualified Roth contribution program-known as a Roth 401(k). In this arrangement, participants may elect to treat their salary deferrals as Roth contributions. Roth 401(k) contributions must meet the following requirements:
They must be specifically designated as Roth contributions.
The contributions must be made to separate accounts and be separately tracked within the plan.
The contributions must be made on an after-tax basis.
They must be limited so that the combined total of pretax salary deferrals and Roth after-tax contributions does not exceed the annual limit ($16,500 for those under age 50 and $22,000 for those age 50 or older).
Here are a few little-known Roth 401(k) tidbits:
One-third of 401(k) plans currently have a Roth contribution feature-and the number is growing.
The income limits that apply for Roth IRA contribution eligibility do not apply for Roth 401(k) contribution eligibility.
Roth IRAs and Roth 401(k)s have separate contribution limits. In other words, Roth IRA contributions do not offset Roth 401(k) contributions, nor can the latter offset the former.
Conclusion
Because work experience and retirement plan types, provisions and options vary, it is essential for investors to understand their personal retirement DNA. Again, financial advisors are in a position to act as personal financial coaches who can help with the decision-making process so that investors can maximize their income opportunities.