Your IRA Questions Answered

The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.

Today's topic: more answers to your questions about investing for retirement.

Several of you have asked questions about investing for retirement and I want to answer some more of your questions in today's episode.

Taxes and Converting to a Roth

A listener named Ashish emailed me with this question:

Can I contribute to a traditional IRA account after taxes? I don't qualify for tax deductions due to income limits. I'm doing this so that I can convert my traditional IRA to a Roth in the year 2010. Secondly, will I have to pay taxes at the conversion time in 2010 if I contribute to a traditional IRA after taxes?

Great questions, Ashish.

The answer to your first question is yes. You can make non-deductible contributions to a traditional IRA even if you're not eligible to make deductible contributions. Although you miss out on the tax deduction, you still get the benefit of tax-deferred earnings growth. The IRA contribution limit for 2007 is $4,000 and it will go up to $5,000 in 2008. If you're age 50 or older, you can contribute an additional $1,000.

To fully deduct contributions to a traditional IRA, your modified adjusted gross income must be less than $62,000 for 2007 if you're single. If you're married filing jointly, your income must be less than $103,000 to fully deduct your contributions.

Advantages of Converting to a Roth in 2010

Your strategy to contribute to a traditional IRA now so that you can convert it to a Roth in the year 2010 is an excellent one. Since your income is too high to allow you to contribute to a Roth now, by planning ahead and contributing to a traditional IRA first, you'll have a healthy sum to convert to a Roth come 2010.

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