Sunday, April 8, 2007

Traditional to Roth IRA Conversions: No Income Restrictions Starting 2010

Congress passed a new law which allows the conversion of traditional IRAs into Roth IRAs without income restrictions starting in 2010. This presents golden opportunities for people who makes more than the current Roth's modified AGI (MAGI) limits (for singles it is $95000 phasing out at $110000; and for married couples it is $150000 phasing out at $160000): note that AGI is gross income - pre-taxed contributions such as 401k). Although taxes (but not penalties) will be levied on any converted amount, Roth IRAs are better than traditional IRAs in several ways:

  • No tax on gains (whereas gains in traditional IRAs/401ks are subjected to INCOME taxes: this is even worse than long term capital gain/dividend taxes!).
  • Penalty withdrawal of principal after 5 years (whereas withdrawls from traditional IRAs are subjected to various rules and taxes are always calculated using a "proportional" ratio of non-contribution/total)
  • No minimum distribution required at age 70 1/2 (as a matter of fact, you can still contribute then--provided you are still working).

If you cannot contribute to Roth IRAs right now (due to MAGI limitations), then it makes sense now to contribution the maximum to traditional IRAs now and convert them to Roth IRAs in 2010.