High-income households have always been shut out of Roth IRAs. But a recent change in the tax law lets you get into a Roth -- and enjoy the benefits of tax-free retirement income -- through the back door.
| Row 0 - Cell 0 | Am I Saving Enough for Retirement? |
| Row 1 - Cell 0 | An IRA Owner's Manual |
| Row 2 - Cell 0 | Fresh Ideas for Retiring Rich |
Under current law, you can't contribute to a Roth if you are single and have an income of more than $110,000, or married with a joint income in excess of $160,000. The new law, which goes into effect in 2010, does not alter the income limits for Roth IRA contributions. But it does eliminate the $100,000 income limit for converting a traditional IRA to a Roth. You must pay income taxes at your top rate on the total amount you convert to a Roth -- that's the price you pay to make all withdrawals tax-free in retirement. To encourage conversions, which will bolster U.S. Treasury coffers in the short run and save you loads on taxes over time, Congress says that folks who convert in 2010 can spread the tab over 2011 and 2012.
By opening the back door to Roth conversions for everyone, Congress effectively wiped out the limit on pay-ins, too. And high-income taxpayers can waltz through the door right away. Starting in 2006, you can contribute $4,000 a year to a nondeductible traditional IRA, or $5,000 if you are 50 or older. (The limits rise to $5,000 and $6,000 in 2008.) In January 2010, when the income limits disappear, you can convert the traditional IRA to a Roth IRA and owe tax only on the earnings.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Let's say you're over 50 and stash $28,000 in a nondeductible IRA during the next five years. Let's further assume your account is worth $32,000 by 2010. When you convert that IRA to a Roth, you'd owe taxes only on the $4,000 in earnings. So the price of admission to the Roth would be just $1,120, assuming you're in the 28% tax bracket. You'd pay half the bill in 2012, when you file your 2011 return, and the rest in 2013. If you're married, both you and your spouse could use this strategy to create substantial Roths, even if one spouse does not have any earned income.
In addition to providing tax-free income in retirement, Roth IRAs are a valuable estate-planning tool. Unlike traditional IRAs, which require you to start withdrawals at 70#189;, Roths have no mandatory distribution age. And your heirs can inherit a Roth tax-free.
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re Big
Gift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax Deduction
Tax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Tax Refund Alert: House GOP Predicts 'Average' $1,000 Payouts in 2026Tax Refunds Here's how the IRS tax refund outlook for 2026 is changing and what steps you can take now to prepare.
-
New IRS Changes to FSA Contribution Limits for 2026: What to KnowHealth Care Flexible Spending Accounts have tax advantages worth looking into, especially in light of new IRS changes.
-
Is a New $25,000 Health Care Tax Deduction Coming in 2026?Tax Policy A proposal from GOP Sen. Josh Hawley adds to the chatter about health care affordability.
-
3 Ways High-Income Earners Can Maximize Their Charitable Donations in 2025Tax Deductions New charitable giving tax rules will soon lower your deduction for donations to charity — here’s what you should do now.
-
An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for YouHealth Savings Even with the promise of ‘triple tax benefits,’ a health savings account might not be the best health plan option for everyone.
-
10 Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
