Traditional IRA Conversions into Roth IRA in 2009 or 2010? Get ready, set, convert. Post #1

Traditional IRA conversions rules under the current tax law allow taxpayers with adjusted gross income of $100,000 to convert their IRA's into Roth, pay the income tax and enjoy the benefits of Roth IRA's.

Deductible Traditional IRA contribution is similar to your contribution to your employer 401(K) plan on a pre-tax basis. These IRA's provide for a current income tax deduction. However, upon distributions you will pay the tax at your ordinary income rate at that time on your IRA contributions and earnings. Income limitation applies as well as coverage by other retirement plans (through employers, or self employed plans).

Whereas, the contribution to Non-Deductible Traditional IRA is similar to after tax contributions you make to your employer 401(K) plan. As a result, upon distributions you will be taxed on the earnings only and not the dollars contributed to the IRA. (Remember, you already paid the tax on these dollars once already, you won't be double taxed). There are no income limitations on individuals prohibiting contributions to non deductible IRA's regardless of coverage by other employer plans.

Roth IRA contribution is on an after tax basis. You ask me, is it different than the non deductible IRA? Oh Yes, since the earnings are income tax free. Yes absolutely income tax free. Similar to non deductible IRA's, you already paid the tax once on these dollars once; earnings are also income tax free. Moreover, you are not subject to dreaded required minimum distributions after age 70 1/2 as required with the traditional IRA's. This means Uncle Sam can't make you take distributions from your IRA if you don't need to or want to for that matter.

Under the current law, not everyone can setup a Roth IRA by contributing new dollars or converting an existing retirement plan, but income limitations apply. You can contribute $5,000 (or $6,000 if you are at least 50 years old) per person to a Roth IRA if your income is $105,000 for single individuals or $166,000 if you are married filing jointly.

You can convert to a Roth IRA in 2009 if your modified adjusted gross income is $100,000 and you are not filing separate from your spouse. However, in 2010 these income limitations disappear. So IRA conversions into Roth IRA's won't be subject to income limitations. The kicker is, if you convert in 2010, you are not paying the income tax on the conversion until April 2011 and 2012. Yes, the IRS allows the income tax bill to be split between the 2 tax years for conversions completed only in 2010. The benefits of ROTH IRA's weigh the initial cost of tax payments for most people, but if you are considering this, please consult with your tax advisor first and keep on reading our future posts addressing this topic. Now that we covered the different IRAs basics, my next post will address the benefits and strategies for conversions.
Stay tuned.......