Income Limitation For Traditional-To-Roth IRA Conversions Eliminated After 2009

Currently, whether they file joint or single, taxpayers are not allowed to convert (rollover) their traditional IRA into a Roth IRA unless their modified adjusted gross income is $100,000 or less. In addition, if they are married, they must file a joint return with their spouse. Beginning in 2010 the income threshold and the joint return requirement are eliminated. Accordingly, taxpayers will be able to convert their regular IRA to a Roth IRA after 2009, without regard to income or filing status. For 2010 conversions, unless they elect out, taxpayers will report the income triggered by the conversion pro rata in 2011 and 2012. This two-year spread is not available for conversions after 2010.

Planning Tip: Regardless of your income level, you can currently contribute to a traditional nondeductible IRA, and convert that nondeductible IRA to a Roth IRA beginning in 2010. You could continue making nondeductible IRA contributions after 2009 and rolling them over into a Roth IRA periodically. However, if you convert a nondeductible IRA to a Roth, the earnings are taxed, meaning if you contribute to a nondeductible IRA and then convert the nondeductible to a Roth after 2009, you must pay tax on the taxable portion of the distribution. The amount of the distribution that is taxable is calculated by aggregating all of your IRAs except Roth IRAs. Traditional deductible IRAs, nondeductible IRAs, SEP IRAs, and SIMPLE IRAs are treated as one IRA in determining the “taxable amount” upon the conversion of an IRA to a Roth.

 

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