With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you're a high-income taxpayer, chances are you haven't been able to participate in the Roth revolution. Well, that's about to change.
What's changing?
In 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. TIPRA repeals the $100,000 income limit for conversions, and also allows conversions by taxpayers who are married filing separately. What this means is that, regardless of your filing status or how much you earn, you'll be able to convert a traditional IRA to a Roth IRA. This provision of the new law doesn't take effect until 2010.
So why concern yourself with this now?
Even though the new rules don't take effect until 2010, there are steps you can take this year if you want to maximize the amount you can convert at that time. If you aren't doing so already, you can simply make the maximum annual contribution to a traditional IRA, and then convert that traditional IRA to a Roth in 2010.
Your ability to make deductible contributions to a traditional IRA may be limited if you (or your spouse) is covered by an employer retirement plan and your income exceeds certain limits. But any taxpayer, regardless of income level or retirement plan participation, can make nondeductible contributions to a traditional IRA until age 701/2. And because nondeductible contributions aren't subject to income tax when you convert your traditional IRA to a Roth IRA, they make sense for taxpayers contemplating a 2010 conversion even if they're eligible to make deductible contributions.
And don't forget that SEP and SIMPLE IRAs can also be converted to Roth IRAs. You should consider maximizing your contributions to these IRAs now, and then converting them to Roth IRAs next year. (You'll need to set up a new IRA to receive any additional SEP or SIMPLE contributions after you convert.)
You can't escape this result by using separate IRAs. The IRS makes you aggregate all your traditional IRAs (including SEPs and SIMPLEs) when calculating the taxes due whenever you take a distribution from (or convert) any of the IRAs.
If you have to pay tax at conversion, TIPRA contains more good news--if you make a conversion in 2010, you'll be able to report half the income from the conversion in 2011 and the other half in 2012.
The Pension Protection Act of 2006 streamlined this process. Now, you can simply roll over your employer plan distribution directly to a Roth IRA. You'll still need to meet the $100,000 income limit if done in 2009 and you'll still need to pay income tax on any taxable dollars rolled over.
Is a Roth conversion right for you?
The answer to this question depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, and how you'll pay the income taxes due at the time of the conversion.
As a financial professional, we can help you decide whether a Roth conversion is right for you, and help you plan for this exciting new retirement savings opportunity
Jeff McKay may be reached at 206-973-4482 or visit our Web site @ www.mckaywealth.com. Proud Title Sponsor of the Highline Medical Center Foundation Golf Classic.

This piece was prepared by Forefield and is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the service of an appropriate professional should be sought.
Securities and Investment Advisory Services offered through: ING Financial Partners, Inc. Member SIPC, McKay Wealth Management and Pacific Rim Financial are not subsidiaries of nor controlled by ING Financial Partners, 6000 Southcenter Blvd, Ste. 70 Tukwila, WA 98188