Ways to Make Sure You Can Pay for the Golden Years

"Both my husband and I are nearing retirement age and are concerned about having enough money for our golden years."

That's what Rebecca Raines of Alexandria wrote to me. But the Raineses aren't alone, as many of us know. Retiring these days is complicated. There are a lot of issues to figure out.

Got a Personal Finance Question? • Transcript: Personal finance columnist Michelle Singletary was online to talk about last-minute tax filing tips, getting your finances organized and any other personal finance topic on your mind.
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To help people answer some of the concerns and questions about retirement, I hosted an online discussion recently with Jan Cullinane, co-author of "The New Retirement: The Ultimate Guide to the Rest of Your Life."

Time ran out, but Cullinane agreed to answer additional questions. Here are some:

Q I am 48 years old and have most of my retirement savings in traditional IRAs. Should I consider transferring these funds to a Roth IRA?

ASingletary: Just so you know, there are two types of IRAs (which, according to the tax code, stands for Individual Retirement Arrangements), traditional and Roth. Contributions to a traditional IRA may be deductible depending on your income and whether you participate in an employer-sponsored retirement plan. Roth IRA contributions are not deductible, but retirement distributions are not taxed the way distributions from a traditional IRA are.

Cullinane: The ability to compound earnings over a number of years and then distribute those earnings tax free using a Roth IRA is a powerful device for accumulating retirement savings. The downside to converting a regular IRA to a Roth IRA is that you will be taxed on the amount converted in the year of conversion. Holders of a regular IRA can convert it to a Roth IRA as long as their modified adjusted gross income (essentially total income with certain adjustments) does not exceed $100,000 (either joint or single, but not married filing separately) in the year of the conversion. However, the amount converted is fully taxable that year. (There is no such thing as a completely free ride!)

So, the decision to convert is based on a comparison of the cost of paying the tax now with the benefit of receiving tax-free distributions after retirement -- which involves the number of years the funds will grow in the Roth IRA before they are distributed, the rate of earnings on the invested funds and the expected tax rate in retirement compared with the tax rate on the conversion today. In general, the longer it is until your retirement distributions start, the more likely it is that a conversion makes sense. Since you are only 48 years old (assuming your income level qualifies), the odds are that it would make sense to convert your regular IRA to a Roth IRA, particularly if you expect your tax rate in retirement to be comparable to (or greater than) your current tax rate.

What are the relative merits of investing in a traditional IRA versus a Roth IRA?

Cullinane: To see which one could be better for you, check out the calculator at www.finance.cch.com(click on "Financial Calculators," then scroll down to "Roth vs. Traditional IRA"). This site allows you to enter your information (age, age of retirement, your tax rate, annual contribution, etc.) and compare how much money you'll have in retirement both pre- and post-tax with both a Roth and traditional IRA.

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'The Most Important Financial Number'

Anyone who uses credit ought to know what a credit score is. And surveys show that most people do.

But many still don't know what information is used to come up with their credit scores, according to a new survey by the Consumer Federation of America (CFA) and Fair Isaac Corp., developer of the FICO credit score used by most lenders to evaluate consumers looking for credit.

Got a Personal Finance Question? • Transcript: Personal finance columnist Michelle Singletary was online to talk about last-minute tax filing tips, getting your finances organized and any other personal finance topic on your mind.
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If I were to tell you that as your income goes up your credit score will increase, would you agree?

If you answered "yes," you need to do some credit score basic training.

And you wouldn't be alone.

Almost one-half of consumers questioned in the CFA and Fair Isaac survey didn't know that increasing one's income will not increase one's credit score.

The fact is, credit scores reflect only your own past credit history and not your income, marital status, occupation or other personal characteristics.

"Despite all of the news coverage about credit scores over the past year, many consumers still do not understand important facts about these increasingly influential numbers," said Stephen Brobeck, CFA's executive director.

How would you answer this question: True or false, a married couple has a combined credit score?

It's false. You might be able to marry for money, but you can't marry your way into a good credit score. Debt that is jointly owed can affect your credit score as an individual. However, couples don't have a combined credit score.

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