2010 Roth IRA Conversion Loophole

Current Roth IRA rules restrict high-income savers from participating, phasing out eligibility from $105,000 to $120,000 for single filers and $166,000 to $176,000 for married couples filing jointly.  Currently, Roth IRA conversion rules follow similar guidelines.  Only taxpayers earning less than $100,000 annually (and not married filing separately) are eligible for a Roth IRA conversion under current law.

The 2010 Roth IRA Conversion Loophole

All that is about to change, starting in 2010.  While the Roth IRA contribution limits will remain, the Roth IRA conversion income limits will disappear.  If you have a Traditional IRA, non-deductible IRA, or any other kind of IRA you will be free to convert to a Roth in just a few months. Here are a few things to keep in mind.

• Convert only if you can afford the tax hit – Converting any tax-deferred IRA (such as a traditional IRA) is a taxable event, meaning you will owe regular income tax on the amount you convert.  If you can’t afford to pay the taxes without dipping into your account’s balance, it’s best not to convert.
• Keep your tax situation in mind - Since a Roth IRA conversion increases your taxable income for the year, converting may boost your income enough to make you ineligible for certain unrelated tax credits or deductions.
• It might pay to delay converting – All else equal, it’s preferable to pay taxes later rather than sooner.  If you can manage it, why not delay converting until 2011 or later?  Or perhaps you are planning on attending graduate school in 2 years at which point you plan on quitting your job to study full-time.  Since your taxable income will be practically non-existent once you quit work, that would be a perfect time to initiate a Roth IRA conversion since your tax rate would be lower.

How High Earners Can Convert To A Roth IRA

The 2010 Roth IRA conversion loophole is basically a cheap trick to allow high earners to share in the tax advantages Roth IRA’s offer.  Sure, the income limits are still there, but starting next year there’s nothing to stop anybody from contributing to a non-deductible IRA and converting to a Roth at the end of every year.  Since there are no income limits for non-deductible IRA’s, there are effectively no longer income limits on Roth IRA’s.

One caveat to look out for when taking advantage of this loophole is that you must keep deductible and non-deductible IRA contributions separate.  If you make non-deductible contributions to an IRA you’ve previously made deductible IRA’s to, it muddies the waters and you could end up owing taxes on contributions you’ve already paid taxes on.