Posts Tagged ‘opportunity’

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you’re a high-income taxpayer, chances are you haven’t been able to participate in the Roth revolution. Well, new rules apply in 2010 that may change all that.
What are the general rules for funding Roth IRAs?
There are three ways to fund a Roth IRA–you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later).

In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2010. If you’re age 50 or older, you can contribute up to $6,000 in 2010. (Note, though, that your contributions can’t exceed your earned income for the year.)
But your ability to contribute directly to a Roth IRA depends on your income level (”modified adjusted gross income,” or MAGI), as shown in the chart below:
What’s changed?
Prior to 2010, you couldn’t convert a traditional IRA to a Roth IRA (or roll over non-Roth funds from an employer plan to a Roth IRA) if your MAGI exceeded $100,000 or you were married and filed separate federal income tax returns.
In 2006, however, President Bush signed the Tax Increase  revention and Reconciliation Act (TIPRA) into law. TIPRA repealed the $100,000 income limit and marital status restriction, beginning in 2010. What this means is that, regardless of your filing status or how much you earn, you can now convert a traditional IRA to a Roth IRA. (There’s one exception–you
generally can’t convert an inherited IRA to a Roth. Special rules apply to spouse beneficiaries.)
And don’t forget your SEP IRAs and SIMPLE IRAs. They can also be converted to Roth IRAs (for SIMPLE IRAs, you’ll need to participate in the plan for two years before you convert). You’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after you convert.
What hasn’t changed?
TIPRA did not repeal the income limits that may prevent you from making annual Roth contributions. But if your income exceeds these limits, and you want to make annual Roth contributions, there’s an easy workaround. You can make nondeductible contributions to a traditional IRA as long as you have earned income at least equal to the contribution, and you haven’t yet
reached age 70½. You can simply make your annual contribution first to a traditional IRA, and then take advantage of the new liberal conversion rules and convert that traditional IRA to a Roth. There are no limits to the number of Roth conversions you can make. (You’ll need to aggregate all of your traditional IRAs when you calculate the taxable portion of the conversion–more on that below.)
Calculating the conversion tax

When you convert a traditional IRA to a Roth IRA, you’re taxed as if you received a distribution with one important difference– the 10% early distribution tax doesn’t apply, even if you’re under age 59½. (The IRS may recapture this penalty tax, however, if you make a nonqualified withdrawal from your Roth IRA within 5 years of your conversion.) If you’ve made only nondeductible (after-tax) contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth. But if you’ve made both deductible and nondeductible IRA contributions to your traditional IRA, and you don’t
plan on converting the entire amount, things can get complicated. That’s because under IRS rules, you can’t just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist Roth IRA Conversions–New Opportunities for 2010

If your federal filing status is:
Your 2010 Roth IRA contribution is reduced if your MAGI is:
You can’t contribute to a Roth IRA for 2010 if your MAGI is:
Single or head of household More than $105,000 but less than $120,000
$120,000 or more

Married filing- jointly or qualifying widow(er)
More than $167,000 but less than $177,000
$177,000 or more Married filing, separately
More than $0 but less than $10,000 – $10,000 or more
Ameriprise Financial
Jeffrey D. Carlson, CFP®
CERTIFIED FINANCIAL PLANNER practitioner
10025 Governor Warfield Pkwy
Suite 209 A
Columbia, MD 21044
(410) 740-8000
jeffrey.d.carlson@ampf.com
April 07, 2010