2010 Roth IRA Income Limits Removed

In case you hadn’t heard, there are no longer any income phase-outs on Roth IRA contributions starting in 2010. In previous years, individuals or couples with a modified adjusted gross income (MAGI) over a certain limit were ineligible to contribute to a Roth IRA. In 2009, the phase-outs began at $105,000 for single filers and $166,000 for those married filing jointly.

This is great news for those higher income earners who have been previously unable to contribute to a Roth IRA. First of all, you can contribute directly to a Roth IRA in 2010. In addition, if you have been contributing to a non-deductible Traditional IRA in previous years, you can now finally convert those already-taxed funds into a Roth IRA, which is almost as good as retroactively contributing to a Roth IRA. You’ll only have to pay taxes on any gains you earned on the contributions, not the actual contributions themselves since they were already taxed before. (With the recent market performance, that isn’t much of a problem for most of us…)

For some reason, there are still income limits on the deductibility of Traditional IRA contributions. So if you are a high income earner within those phase-out brackets, then there is no need for a Traditional vs. Roth debate. Go Roth!

I am in the process of converting my Traditional IRAs into Roth IRAs, and will provide some update shortly. One additional wrinkle is that if you have a mix of pre-tax and post-tax contributions inside your combined Traditional IRAs, you cannot convert them separately. For example, if you have a mix of 50% pre-tax and 50% already-taxed funds, then any converted amount will be assumed to be 50% pre-tax and 50% post-tax. You can’t just convert the post-tax part. This could be one reason not to roll over all pre-tax 401k funds into a Traditional IRA whenever possible.

More info: IRS Publication 590, “What’s New for 2010″

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