Roth Ira

Politics, it is said, makes strange bedfellows. Just about any time a piece of legislations is passed these days, someone, somewhere has a vested interest in slanting it in their favor. And, retirement funds are no exception.

Back in 1978 the U.S. Congress was looking for a way of encouraging people to save money for retirement. After all, Social Security was never meant to replace people's income from work, just augment it. It was thought that if people were given a way to save that also lowered their federal and state taxes, they would use it. The result was the Tax Reform Act. And, in Section 401, paragraph (k), it allowed for the creation of tax-deferred savings accounts for workers, Individual Retirement Accounts (the IRA). The plans eventually took the name "401(k)", for an obvious reason. In 1997, the Roth IRA was created, allowing for a slightly different kind of IRA. And finally, the Pension Protection Act of 2006 added yet another wrinkle to the retirement account system. In that piece of legislation was a little feature that gave IRA holders a huge break. For one year, and one year only, the income cap will be gone.

The year 2010 is a scant few years away, and in that year a unique clause regarding the Roth IRA will go into affect. Specifically, the Roth IRA will be available to anyone regardless of their income, for just that one year. A Roth IRA has a number of advantages over the standard IRA. The chief one has to do with the distributions from the account. Provided certain rules are followed, the funds are tax free. First, the recipient must be older than age 59 years and six months. Second, the Roth IRA must have been owned by the retiree for at least five years. Not a bad situation.

However, the Roth IRAs did have one aspect that was criticized: an income cap. Basically, any person who had a modified gross adjusted income of $100,000 or more could not change their existing IRA to a Roth. Now sure, the average worker can meet this requirement without any trouble. Still, there are a fair number of workers who make more than that, and did not like being deprived of the option to convert.

Enter the politicians. President Bush wanted to extend the tax cuts enacted under his first administration. So, he agreed to several, shall we say odd little quirks in the new tax legislation? One of them was that for one year there would be an exemption to the income cap on Roth IRAs. How they settled on 2010, who can say? But, it means that the income cap of $100,000 will not apply to the Roth IRA for that year. The result? A worker can convert their regular IRA to a Roth in 2010, no matter what they make.

Leave it to politicians to create a one year exemption to something that was otherwise working fine. Still, no sense ignoring something that could potentially help people with their retirement.