Take Advantage of Favorable Tax Laws on Roth IRAs

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Roth IRAs can be a great way to save for retirement.  Earnings grow tax-deferred and withdrawals are tax-free once qualifications are met.  Unlike traditional IRAs, Roth IRAs require no minimum distributions, which can make them a wonderful vehicle for passing wealth to future generations.  Another Roth advantage? Roth withdrawals are not reportable income so they won't affect your adjusted gross income (AGI) during retirement.

Roth IRA Conversions: Income Limits will Lift in 2010

Recently established laws will enable investors who previously were not able to invest in a Roth IRA to take advantage of this vehicle beginning in 2010.  Currently, you are unable to make a conversion from a traditional IRA to a Roth IRA if your modified adjusted gross income (MAGI) is above $100,000, or if you are married but file taxes separately.  In 2010, these conversion restrictions will no longer be in effect.

Beginning in 2010, anyone, regardless of income or filing status, will be able to convert money from a traditional IRA to a Roth IRA.

Why Wait Until 2010?

To take advantage of this change, consider making annual contributions to a traditional IRA, if you have not yet attained the age of 70 1/2, then converting those assets to a Roth IRA in 2010.   You may want to consider this even if your IRA contributions are non-deductible. (You may, however, owe income tax on the amount converted.)

You may be able to make up to $18,000 in contributions if you contribute the maximum amount each tax year between 2006 and 2009; $22,000 if you are over 50 by tax year 2006 (the maximum contributions are $4,000 for 2006 and 2007 and $5,000 for 2008 and 2009 plus a $1,000 Catch-Up contribution if you turn 50 before the end of the year).  That’s up to $36,000 if you are married and up to $44,000 if both spouses are over 50 by tax year 2006 --  a sizeable amount for conversion to a Roth.

Many Investors May Contribute to a Traditional IRA

Many investors do not realize that anyone who has not yet attained the age of 70 1/2, regardless of income, may contribute to a traditional IRA if they have earned income. (For year 2008, the maximum IRA contribution limit is $5,000 for investors under age 50, and $6,000 for those age 50 and older).  The contributions will be non-deductible if your income is over a certain limit and you participate in an employee-sponsored plan.

If your contributions are non-deductible, they will not be taxed at the time of conversion.

The new tax law enables you to spread the tax bill on a conversion over 2011 and 2012 if you make the conversion during tax year 2010.