Question: I will be retiring soon and I want to put my 403(b) retirement plan into an IRA. I believe BUYandHOLD offers both regular and Roth IRAs. Which would be better?

George Rochie

Answer:

Dear Mr. Rochie,

You are correct. BUYandHOLD offers both the traditional and the newer (although not so new anymore) Roth IRA.

Deciding which one is better in your particular case is based on two factors - one, the tax rules involved and two, when you need to tap into the money.

Generally all or most of the money in a traditional IRA has not been subject to income tax. That means those withdrawals will be taxed.

On the other hand, you can withdraw money from a Roth IRA without owing income tax. Earnings, likewise, may be withdrawn tax free. That includes the rolled over amount and all future earnings made in your account will be tax free. Caution: In order to meet this tax free benefit, however, you must wait five years (after the beginning of the year in which you open the Roth) to withdraw money. And you must be 59 ? years old at the time you take money out. (There is a 10% penalty if you take out money prior to returning 59 ?.)

In essence, the Roth offers tax-exempt not tax-deferred benefits.

When to roll over

If you roll over your 403(b) into a Roth IRA late in 2008, it will take a little more than four years, rather than the full five years to meet the five-year requirement. That's because the so-called five-year clock starts at the beginning of the year (in January) the Roth IRA is opened.

When you need to tap into your account

Your personal situation also helps determine which type of IRA is better. If you know you will need money from your IRA to live on during the next one to five years, then a Roth IRA is not a good choice. You'll wind up paying taxes on those withdrawals. A traditional IRA would most likely be a better choice.

On the other hand, if you know that you won't need the money for at least five or six years, then a Roth makes sense.

Another advantage that comes with the Roth IRA is that there are no minimum required distributions after you turn 70 ?. That certainly would be a plus for your beneficiaries.

Bottom line: Whether you select the traditional IRA or the Roth, be certain to convert the money via a direct rollover from institution to institution, also referred to as a trustee to trustee transfer. That way you'll avoid the 20% withholding tax that applies to plan distributions.

As you can see, this is not a black and white decision. You may want to talk with your accountant and together go over the dollar amounts involved and how soon you think you would need to tap into your retirement money.

You'll also find a helpful "Traditional vs Roth" calculator at: www.dinkytown.net. Click on "Retirement."

Good luck!