In Tax-Free Income for All, we described a strategy you can use if you earn too much to contribute to a Roth IRA. To wit: Start contributing to a nondeductible IRA this year and switch the account to a Roth in 2010, when income restrictions on such conversions will disappear.

You can't contribute to a Roth IRA if you are single with income over $110,000, or if you're married with a joint income of $160,000 or more. And if your income is more than $100,000, you currently can't convert your traditional IRA to a Roth. The income limits on contributions will remain in effect even after the ceiling on conversions disappears.

By contributing to a nondeductible IRA now and converting to a Roth later, you would owe tax only on the earnings at the time of the conversion (because you didn't get a tax break on your contributions). This strategy works perfectly as long as you're dealing with a single IRA.

But there's a wrinkle if you have other IRAs -- such as a deductible account or a rollover from a company plan. In that case, the portion of your converted amount that escapes taxes is based on the ratio of nondeductible contributions to the total balance in all of your IRAs. If your total balance is $100,000, for instance, of which $20,000 represents nondeductible contributions, 20% of any conversion would be tax-free.

Bottom line: A Roth conversion could still pay off handsomely in tax-free retirement income. But you may pay a higher price to get access to the Roth IRA.

MORE: Kiplinger.com | Your Retirement | Magazine

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