2010 Roth Conversion Income Limitation Removal
Does anyone know if the removal of the income limitation for Roth conversions in 2010 going to be extended indefinitely, or is the removal of the 100k cap just for 2010?
Thanks.
Does anyone know if the removal of the income limitation for Roth conversions in 2010 going to be extended indefinitely, or is the removal of the 100k cap just for 2010?
Thanks.
Permalink Submitted by Alan Spross on Fri, 2009-11-06 17:38
The income limit is removed permanently for all years after 2009, but only for conversions. No extension legislation is needed. However, income limits remain for regular Roth IRA contributions.
Permalink Submitted by Jack Thomas on Fri, 2009-11-06 22:19
So, going forward to 2010 and beyond, why wouldn’t a person then make non-deductible contributions to a traditional IRA and then convert those funds to Roth IRAs? That seems like a really easy way around the income limits on contributions to Roths. Am I missing something?
Permalink Submitted by Alan Spross on Fri, 2009-11-06 23:02
No, you are not missing anything and this IS a very easy work around to the regular contribution income limits. Many people are planning on doing this, ie make a non deductible TIRA contribution and immediately convert it. If this is their only TIRA account, the conversion will be tax free. The same 8606 that reports the conversion will be used to report the non deductible TIRA contribution.
That said, Congress may decide that something needs to change to offset this work around. They could either limit these conversions or eliminate the Roth regular IRA income limits to produce a consistent outcome with fewer transactions and less reporting (Regular Roth contributions do not get reported). This would also result in some degree of tax simplification which is sorely needed.
Permalink Submitted by Trey Isgrig on Wed, 2009-11-11 02:57
Hi Alan – I have a couple of follow up questions if I may: In 2010, if you are married filing separate and your earned income exceeds $10,000, it is my understanding you cannot make a non-deductible Traditional IRA contribution or Roth IRA contribution – correct? Thus, you still have to consider the income limitation rules if your filing status is married filing separate for Roth IRA or Tradtional IRA contributions (even if its a non-deductible Traditional IRA contribution) in 2010. The work around highlighted is valid for most taxpayers with the exception being if your filing status is married filing separate with earned income exceeding $10,000 – correct? Thanks!
Permalink Submitted by Alan Spross on Wed, 2009-11-11 03:16
No, the work around still applies. It is correct that you cannot make a regular Roth contribution if filing separately and your modified AGI (not earned income) is over 10,000, BUT you can still make a non deductible TIRA contribution, and then convert that non deductible contribution.
For a TIRA contribution, filing status severely limits the deduction, but does not affect the ability to make a non deductible contribution.
Permalink Submitted by Trey Isgrig on Wed, 2009-11-11 04:25
Thanks Alan – Is this another change effective in 2010 or is a married filing separate taxpayer with modified AGI exceeding $10,000 still eligbile to make a non-deductible TIRA contribution in 2009 as well? Thanks again.
Permalink Submitted by Alan Spross on Wed, 2009-11-11 04:33
No, the regular contribution rules did not change for 2010, just the conversion rules. Regular contributions rules are the same for 2009 and 2010.
You must have earned income to make a regular contribution, but MAGI affects the deduction. Also, if a joint return is not filed, the spousal contribution possibility is erased.
Permalink Submitted by Trey Isgrig on Wed, 2009-11-11 04:47
I’m a little confused by your last comment: “Also, if a joint return is not filed, the spousal contribution possibility is erased.” In 2009, if a taxpayer has earned income and modified AGI exceeding $10,000, but the filing status is married filing separate, the taxpayer can still make a non-deductible TIRA contribution in 2009 – correct? The spousal contribution is erased if the spouse has no earned income (or reduced if the earned income is less than $5,000 and under age 50) and a joint return is not filed – correct? Thanks again in advance for the clarification.
Permalink Submitted by Alan Spross on Wed, 2009-11-11 17:59
Correct on first point.
With respect to the spousal contribution, this was not part of your original question but I thought it should be mentioned in light of the married/separate filing scenario. In order to make a spousal contribution using any portion of the other spouse’s earned income, a joint return must be filed. A separate return eliminates a spousal contribution entirely, but each spouse could still make a contribution based solely on their own earned income.
Permalink Submitted by Trey Isgrig on Wed, 2009-11-11 18:30
Perfect – I follow. Thank you!