More Questions About Roth Rollover Rules

Since writing The New Roth Rollover Rules Explained and More Roth Rollover Answers, I still receive a lot of mail about the Roth rollover rules for 2010. So here are answers to two more of your frequently asked questions.

I know that the income limits for converting a traditional IRA to a Roth will be eliminated in 2010. But will the income limits for contributing to a Roth IRA be eliminated in 2010 as well?

No, you still won’t be allowed to contribute to a Roth IRA if your income is above a certain level. But it will be easy for anyone to take a back door into a Roth.

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The IRS won’t release the specific income limits for 2010 contributions until later in the year. But using the Consumer Price Index figures for the 12-month period that ended August 31, 2009, tax-information publisher CCH predicts that for married couples the adjusted gross income limits will increase by just $1,000 from this year. That means the right to contribute to a Roth will phase out as income rises from $167,000 to $177,000. CCH predicts that the income limits for taxpayers who are single or filing as head of household will remain the same in 2010, with the amount you can contribute being phased out as AGI rises from $105,000 to $120,000.

But when the restriction on converting disappears, the limit on contributions loses its sting. “I see nothing in the current law preventing a taxpayer who earns more than the Roth IRA income limits in 2010 from contributing to a nondeductible traditional IRA and then immediately converting to a Roth IRA,” says Nick Kaster, of CCH.

Unfortunately, if you already have a traditional IRA, you can’t simply put $5,000 in a nondeductible IRA, say, and then move it tax-free to a Roth. The tax-free part of the conversion is based on the ratio of nondeductible deposits in all your traditional IRAs to the total balance in those accounts (contributions -- deductible or not -- and earnings). The rest of the conversion would be taxed. See The New Roth Rollover Rules Explained for details.

Can you roll over a 401(k) directly to a Roth? Is that still subject to the $100,000 income limits until 2010?

Yes and yes. The tax laws changed in 2008 to allow you to roll money directly into a Roth IRA from a 401(k), 403(b), 457 or other tax-qualified retirement plan, provided you are otherwise qualified to make an IRA rollover. (Normally, you must wait to switch jobs or retire before you can move money out of your employer-based retirement account, but some plans permit in-service distributions to workers older than 59 1/2, allowing them to roll over some or all of their 401(k) money into an IRA.) Before the rules changed, you had to roll over the 401(k) into a traditional IRA before you could convert it to a Roth.

Currently, you can move the money from a 401(k) or other tax-qualified retirement plan to a Roth only in years when your adjusted gross income is less than $100,000 (whether married or single). But that income limit disappears in 2010. You’ll generally need to pay taxes on the entire conversion if you made only pretax contributions to the 401(k), but a special rule applies if you’ve made after-tax contributions (see A Sweet Deal on Roth IRA Conversions for more information).