Converting to a Roth IRA

There is an income restriction on IRA conversions. Currently, adjusted gross income must be less than $100,000 (not including the conversion amount) before a conversion is allowed. Fortunately, there is good news on this limitation due to last year's tax bill. Starting in 2010, this limitation will no longer apply, and conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.

Personally, because my earned income is low and most of my other income is capital gains, I might get an opportunity to convert my own traditional IRA into a Roth if the market goes against me for a year, thus keeping my taxable income at a low level. It should be noted that, in order to avoid any penalties, assets have to be held in a Roth IRA for at least five years after conversion.

Coming up next: Part 3 will discuss withdrawals from IRAs and the potential penalties involved.