Converting to a Roth IRA

Also, at age 70 1/2, withdrawals are mandated on a schedule that roughly coincides with standard mortality life-expectancy tables.

The Roth IRA reverses the timing of tax liability for the contributions and withdrawals. Contributions are not deductible in the year made. So our couple would need to have $8,000 available to make the maximum contribution. But the huge advantage of a Roth IRA, especially for younger people, is that withdrawals are not subject to tax. Over a period of 20 years, the $8,000 contribution could easily appreciate to $25,000 at a 6% rate of return. None of that amount would be subject to tax.

There are still penalties associated with early withdrawals, but those penalties are only assessed on the earnings withdrawn -- not the original contributions. There are also penalties on any withdrawals made during an initial five-year holding period. However, there are no age-related withdrawal requirements, so assets can continue to grow tax-free for life and then will pass to heirs. While the Roth IRA is part of the estate and may trigger estate taxes, the beneficiary of a Roth IRA can avoid any income taxes by following very simple rules.

Clearly, to me at least, the Roth IRA is the preferred vehicle for most people and especially for younger investors. However, there are lots of variables to be considered, including current tax rates, future tax rates and the age of the investors. And, as a practical matter, availability of capital to invest has to be considered.