Roth Conversion Income Limit
My clients are federal employees with the ability to contribute to a program known as the Voluntary Contribution Program. They are allowed to contribute after-tax dollars, up to 10% of everything they’ve ever made with the federal government, while earning an interest rate declared each year by the Treasury Dept (4.875% in 2007).
Obviously, the interest rate is not the enticement, however, at retirement, they are allowed to roll these after-tax dollars into a non-deductible traditional IRA. At this point, as long as their AGI is less than $100,000 for the year (which it normally is because they are now retired), they can convert to a Roth, paying taxes only on their growth.
My question is that in 2008, I believe the 2006 Pension Protection Act allows for skipping the step to the traditional non-deductible IRA and going directly to the Roth IRA. If this is true, does the $100,000 AGI still apply?
Thanks –
Permalink Submitted by Alan Spross on Sat, 2007-09-29 18:51
Yes, the 100,000 MAGI limit still applies for the direct Roth conversion until 2010. There may also be some delay in doing these rollovers because the Regs have not been released yet that would fully define the issues. One such issue would be recharacterization procedures if someone rolls and goes over the 100,000 limit, or decide they do not want to pay the conversion taxes. I suppose the recharacterization could either go a TIRA or back to the employer plan, but the reporting and other details will have to be refined first.
When everything is worked out however, it will be an effective way to convert with a possible lower taxable percentage than if the employer plan went through a TIRA first with resulting commingled 8606 basis. I do not know if employers MUST offer this rollover. For example, the transfer to a non spouse inherited IRA is optional for employers.