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Income Limits on Roths to Change

The law will allow higher-income people to convert their traditional IRAs to a Roth in 2010 and spread the tax bill over two years.

When is the IRS allowing people to take two years to pay the taxes on a rollover from a traditional IRA to a Roth IRA?

If you convert a traditional IRA to a Roth in 2010, you'll be able to spread the tax bill over 2011 and 2012. That's just one piece of a tax-law change that will give higher-income people a back door into a Roth IRA in 2010.

To contribute to a Roth in 2007, your adjusted gross income must be less than $166,000 if married filing jointly; $114,000 for single filers. At those income levels, you can make only a partial contribution. You can only contribute the full $4,000 -- or $5,000 if you're 50 or older -- if you earn less than $156,000 if married; or $99,000 if single.

The income limits are even lower if you want to roll over money from a traditional IRA to a Roth. Now, you can only convert to a Roth if your adjusted gross income is below $100,000 -- whether married or single.


The $100,000 limit, however, will disappear in 2010. At that point, anyone can convert a traditional IRA to a Roth -- regardless of their income.

The new rules provide a great opportunity for people who earn too much money to qualify for a Roth IRA. You can start contributing to a traditional IRA now, then in 2010 you'll be able to convert the traditional IRA to a Roth.

At that point, you'll have to pay income taxes on your earnings and any tax-deductible contributions at your top rate (you can spread the tax bill over 2011 and 2012), but any earnings after that will come out tax-free in retirement after age 59½. With a Roth, you also won't have to take required minimum distributions at age 70½, and your heirs will inherit the Roth money income-tax free.

For more information about this tax law, see Congress Opens the Door to Roth IRAs for Everyone. For more information on Roths, see Everything You Need to Know About Roth IRAs and IRS Publication 590 Individual Retirement Arrangements.

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