Save on Taxes With New IRA Rules

By Althea Chang, staff writer at MainStreet.com

A change in tax rules, which will allow savers at any income level to take advantage of Roth IRAs, could mean a lower tax bill for you come January.

Currently, retirement savers who make more than $120,000 including certain deductions can't convert their funds to a potentially tax-advantaged Roth IRA. Traditional IRAs and 401(k) funds are taxed on their way out (when you take a distribution), while Roth IRAs are funded on the way in, with after-tax money. The distributions are then tax-free.

As of January 2010, the income cap preventing those with a modified adjusted gross income of more than $120,000 a year (or $176,000 or more if you're married and filing jointly) from converting their retirement savings to a Roth IRA will be lifted, according to a report in The Wall Street Journal.

Here's how the new policy could affect you:

More Options: The elimination of income limits means that people with higher incomes and retirees who've already rolled over their 401(k) and other retirement savings plans can convert their funds to a Roth IRA.

Lower Taxes: A Roth IRA is a good idea if you expect to be in a higher tax bracket in retirement than you are now, whether it's because you'll be earning more, you expect an inheritance, or for any other reason. If you expect to be in a higher tax bracket when you retire, paying taxes on your retirement funds beforehand would mean you'd pay at a lower tax rate, meaning you'd pay less in taxes overall.