Conversions

• Before 2010, single and married taxpayers with modified adjusted gross incomes of $100,000 or more, as well as married couples filing separately regardless of income, could not convert traditional IRA funds to a Roth IRA. Starting in 2010, however, the IRS lifted those restrictions, allowing anyone to move money from a traditional IRA to a Roth IRA. The primary benefit of a Roth IRA compared with a traditional IRA is the right to withdraw money without paying taxes upon reaching retirement age. Unlike with a traditional IRA, however, contributions to a traditional IRA are not tax-deductible.
  
  

Taxes

• The IRS views conversions from a traditional IRA to a Roth IRA as equivalent to traditional IRA withdrawals in that you typically owe regular federal and state taxes on the money you convert. You would not owe taxes on any portion of the conversion that you had contributed to your traditional IRA on an after-tax basis. For 2010 only, the IRS allowed you to wait to pay taxes on conversions and spread them out over your tax returns for 2011 and 2012. This provision was optional, not mandatory, but potentially added to the lure of converting to a Roth IRA.
  
  

Clarification

• The 2010 rules for Roth IRAs did not eliminate the income limits for contributing to a Roth IRA, only those for converting from a traditional IRA. Single taxpayers with modified adjusted gross incomes of at least $122,000 and married couples with modified adjusted gross incomes of $179,000 or more as of 2011 still cannot contribute to a Roth IRA. For single taxpayers with adjusted gross incomes of $107,000 and couples with adjusted gross incomes of $169,000, the IRS reduced the annual contribution limits of $6,000 for account holders who are at least 50 years old and $5,000 for everyone else.
  
  

Considerations

• The 2010 rules for Roth IRAs provide a loophole for high-earning taxpayers who wish to contribute to a Roth account but cannot do so because their income is too high. Since they can contribute to a traditional IRA, they can make traditional IRA contributions and then convert that money to a Roth IRA on an annual basis if they choose. Using this technique, they could contribute up to $5,000 or $6,000 a year to their traditional IRA and then shift that money plus the earnings it generated to a Roth IRA.