Kevin McCoy, CPA

Roth IRAs are usually out of the question for those taxpayers with Adjusted Gross Income (AGI) exceeding certain limits. For 2009 if you make over $120,000 as a single taxpayer or $176,000 as married, filing joint you are ineligible to contribute to a Roth IRA.  Similarly, anyone with over $100,000 in Modified AGI cannot convert a traditional IRA to a Roth*.

*As with tax law, there is usually an exception.  For 2010, the Modified AGI limitation is removed.  Anyone can convert to a Roth IRA this year.

But what if you don’t have an IRA to convert?  No problem, contribute now and then immediately convert it to a Roth.  Even taxpayers making over the above mentioned limits can take advantage of this.

Here’s the to-do list:

1) Contribute to a traditional (nondeductible) IRA. If done before April 15th you can even contribute double the maximum $5,000 annual limit ($6,000 if 50+).  Just make sure your IRA custodian specifies one $5k for 2009 and the other for 2010.

2) Convert it to a Roth IRA – your custodian will likely have a form for this.

Another great benefit to this one-year loophole is the ability to spread the tax hit over 2 years – in 2011 and 2012.  If any of your contributions have been non-deductible (as in the example above), that amount is not taxed (since it was never deducted on a previous tax return).

Of course, every situation is different, so consider this tactic along with your other retirement plan components.  Here’s an interesting article on the pros and cons of conversion.

Are you taking advantage of this 2010 Roth conversion provision?  Have a question about if this will work for you?  I’d love to hear your thoughts in the comments.