This news snuck up on me, but it is worth sharing. There was a provision in a 2006 Tax Bill that removes the limits for Roth IRA Conversions in the 2010 tax year. This means, that as early as January, it will be possible for those making more than $100,000 per year (individuals or ‘married filing jointly’ to convert a Traditional or SEP IRA into a Roth IRA.
The big advantage of a Roth IRA is that all taxes are prepaid. Once funds are in a Roth IRA, there are no more taxes on any future earnings. This is especially fortunate for those of us in our 40s and 50s who are too old and well compensated to have done a conversion already (because of the $100K limit through 2009). And with the recent huge market decline, most equity appreciation, if not all of it (since 1998), has been wiped out. So, it is possible that if you have been making after-tax contributions to your IRA the past 10 years, those savings will never be taxed again if placed within a Roth.
Here is more detail on the tax ruling:
Tax Increase Prevention and Reconciliation Act of 2005
SEC. 512. CONVERSIONS TO ROTH IRAS.
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H.R.4297
Tax Increase Prevention and Reconciliation Act of 2005 (Enrolled as Agreed to or Passed by Both House and Senate)
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SEC. 512. CONVERSIONS TO ROTH IRAS.
(1) IN GENERAL- Paragraph (3) of section 408A(c) (relating to limits based on modified adjusted gross income) is amended by striking subparagraph (B) and redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.
(2) CONFORMING AMENDMENT- Clause (i) of section 408A(c)(3)(B) (as redesignated by paragraph (1)) is amended by striking `except that–’ and all that follows and inserting `except that any amount included in gross income under subsection (d)(3) shall not be taken into account, and’.
(1) IN GENERAL- Clause (iii) of section 408A(d)(3)(A) (relating to rollovers from an IRA other than a Roth IRA) is amended to read as follows:
(iii) unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011.
(2) CONFORMING AMENDMENTS-
(A) Clause (i) of section 408A(d)(3)(E) is amended to read as follows:
(i) ACCELERATION OF INCLUSION
(I) IN GENERAL- The amount otherwise required to be included in gross income for any taxable year beginning in 2010 or the first taxable year in the 2-year period under subparagraph (A)(iii) shall be increased by the aggregate distributions from Roth IRAs for such taxable year which are allocable under paragraph (4) to the portion of such qualified rollover contribution required to be included in gross income under subparagraph (A)(i).
(II) LIMITATION ON AGGREGATE AMOUNT INCLUDED- The amount required to be included in gross income for any taxable year under subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross income under subparagraph (A)(iii) for all taxable years in the 2-year period (without regard to subclause (I)) reduced by amounts included for all preceding taxable years.
(B) The heading for section 408A(d)(3)(E) is amended by striking `4-YEAR’ and inserting `2-YEAR’.
(a) Repeal of Income Limitations-
(b) Rollovers to a Roth IRA From an IRA Other Than a Roth IRA-
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2009.
Here is another very complete interpretation of the tax code changes. But check with your accountant before you make any decisions: