Feature:The 800 lb. Tax Gorilla

The specter of tax hikes likely means growing interest in after-tax savings.

"It is the one area where people think about the retirement discussion that nobody talks about—and it is probably as consequential as anything else," says David Wray, President of the Chicago-based Profit Sharing/401k Council of America, about the impact of tax rates on retirement-savings options. "It has not gotten much attention."

However, that appears destined to change. Even before this year, the United States faced massive unfunded liabilities for programs such as Social Security and Medicare. Now add budget-busters such as health-care reform and auto-industry bailouts. "In terms of long-term financial and tax planning, it raises real questions as to what proportion of people should put their money into a Roth, and do not," says Dallas Salisbury, President and CEO of the Washington-based Employee Benefit Research Institute (EBRI). "You have a growing population who might be better off not deferring the taxes."

A 2010 rule change will make Roth IRA savings possible for people who have not participated up to now because their adjusted gross income surpasses the limit, which, for 2009, is $120,000 for singles and $176,000 for married couples. Another current rule prevents converting a traditional IRA to a Roth IRA if someone has more than $100,000 in modified adjusted gross income. Those conversion income limits end next year, so people can transfer their balances in 2010 regardless of their earnings. Although an income limit on future Roth IRA contributions technically still will apply, high-income Americans will be able to contribute to a traditional IRA, then roll the money into a Roth IRA annually. "You pay taxes on the earnings when you move it into a Roth, and then you never pay taxes on the money again," explains Deborah Walker, a Partner at Deloitte Tax LLP's Washington National Tax Office.

People with a traditional nondeductible IRA only get out the money they put in tax-free; ordinary income tax applies to the earnings, says Leon LaBrecque, CEO of Detroit-based RIA (registered investment adviser) firm LJPR, LLC, which works with both employers and individual investors. Someone who puts money into a Roth IRA pays income taxes on it up front, but the future gains become tax-free. "It is going to be a planning boom," he says of the rule change. "It is a great opportunity to take advantage of tax savings."