Did you convert all of your IRAs to a Roth IRA during 2010? If so, don’t forget to continue to contribute to your non-deductible traditional IRA each year, and then immediately convert that account to your Roth IRA.
Back in 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act into law. This Tax Act included a provision that eliminated the income limitation for people looking to convert their IRAs and other eligible retirement accounts to a Roth IRA as of 2010. As we wrote in our June 2006 Newsletter:
Income Limitation for Roth Conversions Disappears in 2010: Under the current rules, you can only convert your IRAs to a Roth IRA if your income is less than $100,000. The same threshold of $100,000 applies to single individuals and to married couples alike. Starting in 2010, the income limitation disappears, and anyone can convert their IRAs to a Roth IRA. For 2010 Roth conversions, you’ll also have the option to pay the taxes due in 2010, or to spread the tax liability over two years starting in 2011.
What’s interesting is that many people misread this rule and figured that this opportunity would only be available through the end of 2010. While the one provision that allows for you to elect to split the income from the Roth Conversion over the following two tax years applies to 2010 only, there is no mention that the $100k income threshold returns in 2011.
Contribute then Convert
Starting in 2010, there is no rule prohibiting high-income taxpayers from completing a Roth Conversion each year. So while married couples who earn more than $179k and single individuals who earn more than $120k can’t contribute directly to a Roth IRA, those who have no other IRA money can indirectly contribute to a Roth without owing any taxes.
Just make sure to first contribute $5k into a traditional IRA, and then convert that IRA to a Roth IRA soon after. As long as you have no other traditional IRA, SEP IRAs, or SIMPLE IRAs, you shouldn’t be taxed on this Roth Conversion.
I’m not sure that was the intent of this provision of the Tax Act when issued back in 2006. But these are the rules as they currently stand, so you might as well use this two-step approach to fund your Roth IRAs until Congress decides to change this rule down the road.