Traditional to Roth IRA Conversion Loophole in 2010
Published in Tricks | 9 Comments
If you wanted to convert a Traditional IRA to a Roth IRA today and you earned more than $100,000, you’d be out of luck. However, because of Tax Increase Prevention and Reconciliation Act of 2005 signed into law on May 17, 2006, you can wait until 2010 to do the conversion when the $100,000 income test no longer applies. If you do make the conversion in 2010, you can push half the taxable converted amount taxed in 2011 and half in 2012 (just to help ease the pain).
There is still plenty of time for Congress to pass acts that close this loophole since 2010 is over two years away (though Congress doesn’t move that fast), but until then this is a great way to get around the Roth IRA contribution limits.
If you participate in an employer sponsored retirement plan (401k, 403b, etc.), then you’ll probably know that any contributions to a Traditional IRA are likely not tax deductible (or at least phased out partially) because of income restrictions. However, by this loophole, you can then convert those over to a Roth IRA free of charge because you’ve already paid the tax on them. You would only have to pay the taxes on the gains you’ve made in that time. For example, if you put in $4,000 into a Traditional IRA and could deduct nothing. If by 2010, you see that your IRA is now worth $5,000, you could convert and only pay taxes on the $1,000 of gains, not the full $5,000. This plan is not without risk because Congress can always put the loophole back. Plus, remember to keep all your documentation that your contributions were not deducted.
June 19th, 2007 at 12:35 pm (#)
[...] Does it cost anything to change a Traditional IRA into a Roth? Yes, you have to pay the taxes on the amount you convert from a Traditional IRA to a Roth IRA. Until 2010, you have to earn less than $100,000 a year in order to convert a Traditional IRA to a Roth IRA. When President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005, it removed that requirement in 2010 making it possible for everyone and anyone to do the conversion. (more on the 2010 IRA conversion loophole) [...]
June 25th, 2007 at 5:03 am (#)
[...] from Roth IRA Explained gives us some valuable heads up on the Traditional to Roth IRA Conversion Loophole in 2010. There’s some time left for Congress to change things up for us even as we await 2010 for that [...]
May 2nd, 2008 at 6:56 am (#)
[...] a Roth IRA is a very complicated question and one that many people will start asking soon when the IRA conversion loophole opens up in 2010. Whether or not you should convert your IRA comes down to several questions and they will help you [...]
May 2nd, 2008 at 8:49 am (#)
[...] the Tax Increase Prevention and Reconciliation Act of 2005, signed in May 2006, introduced a conversion loophole in 2010 that removed that $100,000 rule. In 2010, anyone is permitted to convert from a Traditional IRA to [...]
August 8th, 2008 at 12:53 pm (#)
[...] 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 [...]
October 18th, 2008 at 8:16 am (#)
I am 60 and already retired. I have $ in traditional IRAs. Can I convert to Roths? Since the economic downturn, my IRAs have lost a lot of value and I would like to take advantage of that if I can.
October 22nd, 2008 at 1:34 pm (#)
This discussion is oriented to those still working- What would the situation look like when we are retired and the 401k has been converted to a regular IRA. Since we are entitled - in fact required- to take out money without penalty- would it be more desiraeable to convert to a Roth IRA. Does the required distribution from a regular IRA enter into the amount of over 100,000? If it is- that is a double negative. Without the distribution I would be under 100,000 but with the distribution- I would exceed the 100,000. One reason for converting seems to be to reduce the income feature in suceeding years with the new socialism perhaps coming into play.
Chuck Hunter
November 20th, 2008 at 8:17 am (#)
Chuck, I am doing exactly what you are suggesting for the reason you suggest. I have checked it out with a couple of financial advisors and they say the strategy is a good one. Values are down so taxes will be down. Value should go up. If you don’t need the money for awhile, it can be a good deal.
I think in fact if some of the IRA’s have lost money, the conversion is ZERO. I have been looking for a confirmation on that point, but it would make sense.
March 23rd, 2009 at 8:15 pm (#)
Hi there. I rolled over my 403B from my previous employer to a Roth IRA. They took out over $4000 in Federal and State taxes and the remaining $11,500.00 went into the Roth IRA. I found out, while doing my taxes, that I should not have put more than $5,000.00 into the Roth IRA or else I will have to pay over $400 in penalty fees. I have auto deposit each month to into the Roth IRA. I think I have until April 15th to avoid the fee, but how? What should I do to prevent fees and any other unfortunate consequences? THANKS!