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Taxes and Converting to a RothA 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.
Advantages of Converting to a Roth in 2010Your 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.
Switching from a Traditional to a RothAnd 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.)