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Rules
One of the most popular questions I get is whether a teenager can get a Roth IRA and the answer is yes, as long as they have income.
The rule for the Roth IRA is that you can contribute based on how much you’ve earned in a year. If you’ve earned $2,000, you can contribute up to $2000 (after taxes) to your Roth IRA. If you earned more than $5,000 then the limit for the Roth is $5000.
When it comes to teenagers, you will want to open a custodial account at a brokerage. Since they’re under the age of 18, they can’t open their own account but you can open one on their behalf, you are their custodian, which is effectively the same thing. For all intents and purposes, the account is theirs but you are watching over them to make sure they don’t make any mistakes, right? 
Remember, they can only contribute as much as they declare on their taxes. So, if they’ve been mowing lawns and don’t intend to claim that income on a Form 1040, they can’t put that towards their Roth IRA. Technically, your children have to claim that income but if they don’t, they can’t use it towards their Roth IRA.
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Rules
I met with my accountant this week and one of the things we discussed was retirement. I told him that I was going to try to take advantage of the 2010 Roth IRA conversion loophole by contributing to a non-deductible Traditional IRA starting this year (2008). A quick recap on the rule is that right now you have to earn under a certain amount to be eligible to convert, in 2010 that rule disappears and anyone can do the conversion. With respect to taxes, you pay income tax on the amount you convert and that amount now enters the Roth IRA world.
So, the recommendation he gave me was that if I’m going to do this, I need to keep my non-deductible Traditional IRAs segregated from my other Traditional IRAs. Right now I have a Rollover IRA at Vanguard so I will want to keep that one separate from the non-deductible one. When it comes to do the conversion, I won’t have any headaches separating the two. When I do the conversion, I pay no tax because I never deducted the contribution in the first place.
What happens if I don’t separate them? You have some minor headaches. The conversion process allows you to pick how much you want to convert. You can convert the whole thing or convert a part. When you mix the deductible and the non-deductible, you make things a little more chaotic. If you opt to convert only 50%, you can’t convert just the non-deductible part, you’ll have to convert based on the weightings. This is better explained with an example.
Let’s say your IRA has $8,000 in deductible IRA contributions and $2,000 of non-deductible IRA contributions. If you elect to convert 50% of that IRA to a Roth IRA, you’ll have to take $4,000 of the deductible contribution and $1,000 of the non-deductible. You can’t choose to take $2,000 of the non-deductible and $3,000 of the deductible IRA. If you keep them in separate accounts, you can convert them independently and thus avoid this problem.
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Rules
If you’re thinking about converting your Traditional IRAs into Roth IRAs, paying the taxes, and then watching your earnings grow tax free, great! If you’re also taking Social Security benefits, you might want to take a step back and talk to a professional tax accountant before you do that conversion.
When you convert a Traditional IRA into a Roth IRA, you declare that converted value as income. As you probably now know, that income can affect your Social Security benefit payout for the year. If your total worldwide income, including tax-exempt income and half of Social Security, exceeds a certain amount, then your Social Security benefit may be subject to taxes.
For Single filers and Head of Household, the first level is at $25k. For Married Filing Jointly, the first level is at $32k. If your total income, including tax-exempt and half of SS, then 0% of your benefit is taxed. If, as a Single or HoH, you earn between $25k and $34k ($32k and $44k for MFJ), then you will pay taxes on 85% of your SS benefit. If you earn more than $34k (or $44k), then 85% of your SS benefit is taxable.
It’s something to factor in if you are considering converting your IRAs.
