Why more wealthy Americans are putting their eggs in Roth baskets

Affluent Americans are showing a growing preference for paying taxes on their retirement savings sooner rather than later.

Data released earlier this month by the Internal Revenue Service shows that conversions from tax-deferred individual retirement accounts to Roth IRAs increased ninefold in 2010, to $64.8 billion. That was the first year when a $100,000 income limit on eligibility to convert was eliminated – and it marked the first time the amount of assets converted to Roths exceeded contributions.

For wealthier households, conversions are more relevant than direct contributions to a Roth IRA. This year the full direct contribution is available to single filers with income up to $114,000, and $181,000 for joint filers. Annual direct contributions to IRAs (Roth and traditional) are limited to $5,500 annually (plus $1,000 in catch-up contributions if you’re over age 50).

But there’s no limit on conversions for investors with multiple IRAs, or on the amount that can be converted.

Paying taxes now rather than later isn’t beneficial if you expect to be in a lower tax bracket when you begin drawing down funds in retirement – which is the case for many retirees. But Roth IRAs offer several other advantages over traditional IRAs. Learn more in my column today at Reuters Money.