Income Limits for Roth IRA Conversions to be Eliminated

Income limits that have prevented many people from converting from a traditional IRA to a Roth IRA will be eliminated on January 1, 2010.

With a traditional IRA, contributions and growth of capital are tax free, but distributions are taxed as normal income.

Roth IRAs differ in that contributions are taxable while growth of capital and distributions are tax free.  In addition, unlike traditional IRAs, there are no required minimum distributions with Roth IRAs.  Last, with a Roth IRA your heirs do not owe income tax on withdrawals.

The Roth IRA is a very attractive retirement savings vehicle that has thus far been unavailable to people whose adjusted gross income exceeds certain levels. 

In 2009, the restrictions apply to individuals making more than $120,000 and to couple who file jointly making more than $176,000.

In addition, a person is not allowed to convert a traditional IRA to a Roth IRA if their household's adjusted gross income exceeds $100,000.

It is the limits restricting Roth IRA conversions that will disappear in January.  The restrictions on contributions will remain in place.

Taxes must be paid when converting from a traditional IRA to a Roth IRA.  That said, tough market conditions may have decreased the tax basis for many who wish to convert, so the timing in the next year or so could be very attractive.

Source: Wall Street Journal (subscription required)

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