Roth IRAs Grab Spotlight Amid New Tax Law

Whether married or single, taxpayers can't have more than $100,000 in adjusted gross income if they want to convert. But if you're well below that mark (as many retirees are), you may want to use up your 15% tax bracket each year, and maybe even your 25% tax bracket, by converting enough money to reach the bracket's limits. You can convert enough IRA money each year to use up these low tax brackets. (The 15% bracket ends at $56,800 in taxable income for married couples, and at $28,400 for singles.)

By converting even just a portion of an IRA, investors can take advantage of the lower income tax rates (before they disappear in 2011) and shelter money tax-free in a Roth IRA indefinitely.

For those of you unable or unwilling to convert to a Roth, consider this option: Withdraw money that you don't need from your retirement account. That sounds counterintuitive -- typically planners advise clients to leave money in tax-advantaged accounts for as long as possible. But many people over 59 and a half are loath to withdraw money from their retirement accounts for such "frivolous" expenses as a family vacation or a new car, even if they can afford the luxury. But withdrawing now could mean paying less tax than waiting a few years.

"A lot of our clients have retirement accounts so big that by the time they're forced to take the required minimum distribution at age 70 and a half, the minimum distribution puts them in the third or fourth tax bracket," says Kathy Stepp, a CPA and financial planner in Overland Park, Kan. "But if you're in a lower bracket now, start taking some withdrawal to fill out the 15% or even 25% brackets. You'll pay less tax now than you will later on."

Now, no one would advise you to raid your rollover IRA to finance a little fun in the sun. But if you're in a lower tax bracket and are certain you won't be endangering your retirement (and, of course, are older than 59 and a half, before which age you'll pay a 10% penalty for distributions), then this year or next might be a good time to draw down some funds to take advantage of the lower and wider brackets.