Your IRA Questions Answered

There are two reasons why 2010 is a magic year: First, the IRS is removing the income restriction on Roth conversions in 2010. Anyone can convert existing IRA assets to a Roth in 2010, even high-income earners with modified adjusted gross incomes over $100,000. And second, you'll be allowed to pay the federal tax on the converted amount over two years instead of having to pay it all in one tax year. You can pay half the tax in the year 2011 and the other half in 2012. Spreading out the tax burden over two years makes it a lot easier to manage.

The answer to your second question about whether you'll have to pay taxes on the amount you convert to a Roth takes a little explaining. In your situation, you won't need to pay income tax on the contributions you convert from your traditional IRA to a Roth because you contributed after-tax money and did not deduct your contributions. You've already paid tax on the contributions, so you won't have to pay tax again when converting it to a Roth. However, you will need to pay tax on the earnings. And, if you had made any deductible contributions, you would need to pay tax on those too.

Switching from a Traditional to a Roth

And here's a question from another listener:

Hi, Money Girl. I love the show. My name is John from Florida and my question is this: I am not a high earner and I would like to go to a Roth IRA. I've been investing in a traditional IRA for about 10 years now and I'm not certain how to get out of the traditional and get into the Roth, or even if I can make my contributions now into a Roth and kind of park the traditional. It's all confusing to me and I hope you can help me. Thank you.

Hey there, John. Switching from a traditional IRA to a Roth IRA is really straightforward. All you need to do is open a new Roth IRA account and begin contributing to it. To contribute to a Roth IRA, your modified adjusted gross income must be $99,000 or less in 2007 if you're single or $156,000 or less if you're married filing jointly. At higher incomes, you can make partial contributions. (*See note.)

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