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Money Girl's Quick and Dirty Tips for a Richer Life,
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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
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.