Convert To Roth Ira Regardless Of Income ? 2010

An odd quirk in the recent legislation to extend the Bush Tax Cuts is giving IRA holders a huge break. For one year, and one year only, the income cap will be gone.

Convert To Roth IRA Regardless of Income ? 2010

2010 may seem like a long way off, but something magical is going to happen then if you prepare for it. The recent legislation extending the Bush tax cuts contains a unique clause regarding the Roth IRA. Specifically, it contains language that makes the Roth IRA available to anyone regardless of their income, but only for one year.

A Roth IRA is a retirement account that offers a lot of advantages. The primary advantage is found in the distributions from the account. Simply put, they are tax free if a couple of requirements are met. First, the distributions must be made after you pass the age of 59 years and six months. Second, you must have owned the Roth IRA for at least five years. If you meet this test, the money is yours free and clear including all the gains you have made from your investments over the years.

The only criticism of Roth IRAs has to do with income caps. Simply put, a person with a modified gross adjusted income of $100,000 or more cannot convert an existing IRA to a Roth. While many people fall below this income cap, those that were just over it certainly have had a beef.

In an effort to extend his tax cuts, the President agreed to a number of oddities in the new tax legislation. One of the strange clauses is a single year cap exemption. In 2010, the income cap of $100,000 will not apply to the Roth IRA. Put in simple terms, you can convert to a Roth in 2010 regardless of how much you make. You can only do it in 2010, not 2009 or 2011.

There appears to be no reason why the politicians would create a one year exemption to the Roth IRA income cap. It certainly seems a bit fishy, but you might as well take advantage of it. While 2010 seems far off in the future, it gives you time to plan any conversion. Remember, if you convert a traditional IRA to a Roth, you must pay taxes on the moved money. If at all possible, you will want to do this with cash you save between now and then. The more money you can cram into a Roth, the better off you will be in the end.

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What Can You Contribute To A Roth Ira?

Given the tax-free distributions from Roth IRAs, one is tempted to stuff every penny possible into one. Alas, the IRS isn?t particularly keen on such an approach.

The Roth IRA is a very effective tool in a life long financial planning process. It is structured in a manner that allows it to accumulate a great deal of investment earnings during your lifetime and then allows you to withdraw these earnings after retirement without having them subject to income tax. The money contributed to the plan is taxed before it is deposited and so it is not subject to additional tax.

The only drawback to this is the cap put on contributions. Roth IRA caps are set at $4000 per year maximum for people under the age of 50. People above the age of 50 can contribute an additional $1000 per year for a total of $5000. These figures will increase to $5000 and $6000 per year in 2008. After that they will increase yearly in $500 dollar increments based on the yearly inflation rate.

These caps on contributions are really only a problem for people who receive a large lump sum amount of cash in a given year and desire to put a large portion of it into a tax sheltered account for investment purposes. This is very likely the reason for the cap in the first place. The Individual Retirement Account was not intended for that kind of investment tax shelter. It was designed to provide supplemental income for life after retirement.

A few calculations illustrate this point. The maximum contribution in 2008 of $5000 equals about $416 per month or a little over $100 per week. When seen this way, the figure does not seem overly restrictive to wage earners who are just beginning their careers. Assuming that a person opens a Roth IRA at age 21 and makes the maximum contribution each year until age 65, there will be a tidy sum invested. Of course, the account owner can never go over the qualifying income level and not make any early withdrawals. Also, it would assume that the inflation rate does not rise which is highly unlikely.

The above example would mean that the worker would contribute $5000 a year for 28 years or when they reach the age of 49. They would also contribute $6000 for another 15 years until age 65. This would yield a total of $230,000 in pre-taxed contributions. The investment earnings of this much capital, even when invested in safe low yield investments, for that many years would be staggering. The bottom line is that the contribution caps are annoying, but not a critical flaw of the Roth.

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