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Question: Would you explain how the new IRA conversion works for high income people.

Ann Argus

Answer:

Dear Ann,

Right now, if you file as a single and earn more than $110,000 a year (more than $160,000 for married couples) you cannot contribute to a Roth IRA. You are simply locked out - 100%.

And, if your annual adjusted gross income is over $100,000 you are not allowed to convert a traditional IRA into a Roth IRA.

Two very restrictive rulings!

The Tax Increase Prevention & Reconciliation Act of 2005, which was signed into law this past May by President Bush, has ended the income limitation on conversions. Beginning in 2010, anyone, no matter what their annual adjusted gross income, can convert a traditional IRA into a Roth.

So, if you are currently shut out of the Roth, and if you think you will be in the same or a higher tax bracket when you retire, it would be smart to start making the maximum contribution to a regular IRA this year so you'll have as much as possible in your account by 2010.

Note: The maximum you can contribute to a regular IRA this year is $4,000 -- plus $1,000 if you are 50 or older.

You will be required to pay taxes on the earnings in your traditional IRA when you make the conversion. However, you can spread out your tax liability over two years.

Key points to remember

With a traditional IRA, your contribution may be tax deductible. Withdrawals are fully taxed.
With a Roth IRA, your contribution is never tax deductible. Withdrawals after age 59? are tax-free.
With a Roth, you can continue to make contributions after age 70 ?. You are never required to take money out as long as you are living.
With a traditional IRA, you must start taking out money at age 70 ?.

Run the numbers

Before making a decision about whether to convert or not, go to www.dinkytown.net and enter your numbers in the Roth Conversion Calculator. You might also want to discuss the matter with your accountant.

You can have a traditional or a Roth IRA at BUYandHOLD. And, you can either open a new account or roll over an existing IRA (held with another financial institution) into one here. For instructions, click HERE.

Good luck!

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