2010 Roth IRA Income Limits Effectively Removed

Okay, let’s try this again. There are no longer any income phase-outs on Roth IRA conversions from Traditional IRAs. As in previous years, individuals or couples with a modified adjusted gross income (MAGI) over a certain limit are ineligible to contribute directly to a Roth IRA. In 2010, the phase-outs begin at $105,000 for single filers and $167,000 for those married filing jointly.

However, with no conversion limitations, people with any income can simply contribute to a Traditional IRA and then convert that to a Roth IRA immediately afterwards.

This is great news for those higher income earners who have been previously unable to contribute to a Roth IRA. In addition, if you have been contributing to a non-deductible Traditional IRA in previous years, you can now finally convert those already-taxed funds into a Roth IRA, which is almost as good as retroactively contributing to a Roth IRA. You’ll only have to pay taxes on any gains you earned on the contributions, not the actual contributions themselves since they were already taxed before. (With the recent market performance, that isn’t much of a problem for most of us…)

One additional wrinkle is that if you have a mix of pre-tax and post-tax contributions inside all of your combined Traditional IRA funds, you cannot convert them separately. For example, if you have a mix of 50% pre-tax and 50% already-taxed funds, then any converted amount will be assumed to be 50% pre-tax and 50% post-tax. You can’t just convert the post-tax part. This could be one reason not to roll over all pre-tax 401k funds into a Traditional IRA whenever possible.

More info: IRS Publication 590, “What’s New for 2010″

Comments

  1. I don’t know why they don’t just forget the funky conversion trick and just allow you to contribute directly. I guess that’s our government.

  2. I don’t know if that’s totally accurate. You’ll have to pay taxes on anything you convert from a Traditional to a Roth because you didn’t pay taxes the first time. Isn’t that sentence backwards?

  3. Great. So I want to buy TIPS. I dont have an IRA and I max my 401K every year and I am not planning to retire in USA. How can I open an IRA, buy TIPS in it and then immediately convert it to Roth.

    Also, Can I do it for 2009 and then convert it for 2009
    Then do it for 2010 and convert it for 2010
    and then again for 2011.

    Anyone knows?

  4. Oh Crap forget it. I cannot contribute to IRA. MAGI 109k+ does not qualify. This sucks.

  5. I think you maybe wrong about this statement unless I am interpreting it incorrectly which I think is the case

    “However, with no conversion limitations, people with any income can simply contribute to a Traditional IRA and then convert that to a Roth IRA immediately afterwards.”

    You are saying people with higher incomes can contribute to a Traditional IRA. If your incomes are too high for ROTH IRA contribution, then your incomes are too high for traditional IRA as well. Isnt it ? So i cant contribute to the traditional IRA and then convert it to Roth.

    Can I ?

  6. OOPS. Sorry I got confused between deductibles and contributions. I apologize. Can you Please remove the above two comments. Please

  7. If your IRA contributions aren’t tax deductible, then you’ve already paid tax on them and should be able to immediately convert to Roth without a tax hit on the contributions. Any earnings, however, are taxable. This starts this year (2010); not retroactive to 2009.

    But you can convert prior traditional IRA contributions starting this year. For example, it’s not too late to make contributions to your 2009 traditional IRA and then convert those to Roth this year. Some folks made non-deductible contributions to traditional IRAs the last couple years with the goal of converting to Roth this year. That’s not as automatic of a decision now given the high earnings (and corresponding tax on earnings) due to the market’s high returns in 2009.

  8. You are saying people with higher incomes can contribute to a Traditional IRA. If your incomes are too high for ROTH IRA contribution, then your incomes are too high for traditional IRA as well. Isnt it ? So i cant contribute to the traditional IRA and then convert it to Roth. Can I ?

    You can. People with higher incomes can contribute to a traditional IRA; they simply can’t deduct those contributions. The contributions, therefore, are made with after-tax dollars.

  9. Does anyone know if I can rollover a ROTH IRA TO A ROTH 401K? I want to do this for easy of management.

  10. Sorry, I’m not sure i read this correctly. My income levels exceed the max for Roth IRAs and I also cannot get a tax deduction for amounts i invest in a traditional IRA (which is why i haven’t invested anything in either). Now, in 2010, are you saying that i can invest in a traditional IRA and then immediately convert to a Roth IRA (and therefore have those gains grow tax-free)? If that is the case, what is the max i can invest?

  11. Good to know! I like the new rule. Not that the new rule really helps me out, but at least it might someday and it will help alot of other people out now as well. Because let’s face it, people need to save more for retirement, and a roth ira is a great way to get the job done.

  12. Yes, this year you can convert any IRA into a Roth no matter what your income. Your IRA can have pre-tax money (your income was low enough to get a tax deduction on contributions), after-tax money (your income was too high so your IRA contribution was made with no tax-deduction), or a combinations of both. IRAs have a contribution limit of $5000 ($6000 if you are 50 or above). Therefore, you can contribute $5000 to any IRA (although it might as well be non-dedutible since taxes will be due on the conversion) and immediately convert to a Roth.

  13. Thanks for all the posts. Two questions: if you convert to a Roth, can you then contribute to it (even if you didnt qualify to open one based on income)? second, can you convert a fully-pre-tax IRA to Roth (not a great idea, just asking on the possibilities?)

  14. Personal Finance Student says:

    It’s great that you can contribute no matter your income. Now to tangle through the confusing pre-tax and post-tax stuff.

  15. “OOPS. Sorry I got confused between deductibles and contributions. I apologize. Can you Please remove the above two comments. Please”

    And you make $109K+ a year? What did I do wrong?

  16. Question: If my wife & I file jointly and make >$177k, the only way we can contribute to any IRA is via nondeductable traditional then convert to Roth. My question is, if I essentially pay taxes by contributing nondeductable, do I pay taxes again when I convert to Roth? Or does it convert straight through without additional taxes and the earnings grow free?

  17. @ Mike L, you answered your question in the second part.. Yes it converts straight through without additional taxes….You are merely converting an existing IRA.

  18. Thank-you Rashaad ! Much appreciated.

  19. With most of the industry’s attention regarding IRAs (Individual Retirement Accounts) being on converting from traditional to Roth IRAs, the more critical issue might be that many of the over fifty million retirement plan holders may not economically survive retirement at all.

    Total U.S. retirement asset values are down over 20% in the last two years. With interest rates at historic lows and inflation and taxation on the rise, I would think that the primary objective should be on educating plan holders on the profound effect that these variables have on their plan balances and future income streams.

    Retirement assets are, by their very nature, self depleting. By that, I mean that plan owners will begin some kind of amortization process at retirement. Whether they own a traditional account, a Roth or both, these funds will more than likely be consumed by most owners during retirement.

    The Investment Company Institute’s 2009 Investment Company Fact Book, sites that over $390 billion of IRA deposits were held in bank and thrift accounts at the end of 2008. According to bankrate.com, the average Jumbo IRA Money Markets APY is less than 1.10% as of 01/20/2010.

    Plan owners need to understand that without careful and well thought-out planning now, they could very well find themselves with less income in later years than at the beginning of retirement.

    Consider the following traditional plan owner who has a $100,000 plan balance and will begin taking required minimum distributions (RMDS) at the end of the year. A 25-year amortization of the plan, calculated at a 1.8% APY, shows that, at age 94, the RMD will be $3,689, which is less than the $3,716 RMD taken in the first year. The IRA plan’s balance at the end of 25 years will be down to less than $30,000.

    If we contrast these values with an APY of 3.8%, the age 94 RMD of $6,000 will be more than the $3,789 RMD taken in the first year. Also, the plan’s balance at the end of 25 years will be more than $48,500. Taking on the risk required to earn another 2.0% can mean tens of thousands in additional retirement benefits.

    Most people wouldn’t take out a mortgage without a detailed amortization schedule being provided. Why, then, wouldn’t they want one for their IRA?
    The focus should be on educating retirees on the management of their qualified plan balances and income streams, by providing and comparing IRA amortization schedules that reflect the profound difference just a few percentage points in rates of return can have on their plan values. Conduct a web search for “IRA management software” (including quotes) to find software programs that provide traditional IRA planning tools.

    Qualified plan owners who are near or at retirement and have estimated marginal tax rates above 25% should consider that the break- even point of a Roth IRA conversion may exceed life expectancy. Conduct a web search for “Roth conversion software” (including quotes) to find software programs available that can make the determination if a conversion is the right course of action.

  20. This should be an easy one……. Let’s say I come into a fair amount of money. I want to invest it some where. I can’t dump it all in an IRA, Roth or other wise, correct. What does a financial dummy do? Oh, 59 yrs. of age and not in any retirement vehicle.

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