The Roth IRA was created in 1997 and created quite a bit of excitement; however 2010 just may be its most exciting year yet. While many of the contribution limits and the basic rules are the same one thing that is changing is the Roth IRA conversion. Of course, another constant of the Roth IRA is that tax free money awaits you when you hit retirement. Here are a few of the major rules of the 2010 Roth IRA:
Photo by: Thomas Picard
1. The contribution limits have stayed at the same levels as they were in 2009; in 2009 if you were 49 and under the contribution was $5,000 and if you were 50 and over it was $6,000. That amount is still the same in 2010.
2. 2010 is the year for the big conversion; while this is the actual year that you can convert you can actually defer the claimed income until 2011 and 2012. Since the IRS expects that many people will take advantage of this they created a provision on how taxes are to be paid. You will have an option of being able to claim half of the conversion amount as income in 2011 and the other half to be claimed in 2012. Remember that this is only for 2010, after that all taxes will have to be paid in full the next year.
3. There was a small increase in phase-out limits; those that were on the outside looking in on the Roth IRA’s really did not get a lot of help when it comes to the phase-out limits. Those filing single gained no improvement and joint filers only received an increase of $1,000 at both the top and bottom ranges.
4. There were people that want to take advantage of this IRA for a while but were unable to because of surpassed phase-out limits which resulted in them settling for a pre-tax substitute found in the traditional IRA. The main problem with the traditional IRA (of course other than having to pay retirement taxes) is that after reaching income limits you would not get a tax deduction for contributing to the IRA, but you still get the tax deferred growth. If you are what is considered an active participant, meaning you make annual additions or accrue a benefit, in a company’s plan and if you make more than $109,000 when filing married joint returns or $65,000 filing single in 2009 then you are disqualified from being able to have the full deduction, which leaves you with a nondeductible IRA.
Originally there was nothing appealing about the nondeductible IRA, but it has now become a popular way for the higher wage earners to get into the Roth IRA; through a back door so to speak. By contributing to the nondeductible IRA in 2009 it can be now be converted to the Roth IRA in 2010.
