The Secret to Funding a Roth IRA, regardless of your income!

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Currently, if your AGI is less than $100,000 annually you are eligible to convert your regular IRA to a Roth IRA.

Unfortunately, for a married couple with dual incomes, making 105K, you can’t convert to a Roth IRA because you make too much money. You’re barely crossing the eligibility threshold and it just doesn’t seem fair. That’s an especially hard pill to swallow.

As I’ve written before that’s all changing in 2010 when the 100K AGI restriction is lifted. Gone. Goodbye. In the meantime, there are still a couple things you can do now to get ready…

Two ways to prepare

There are two ways that you can prepare for doing a Roth conversion in 2010.

The first is to look at the size of your existing traditional IRA’s, company plans, SEP’s and Simple IRA’s, assume an average rate of return on those accounts, factor in continued contributions and come up with an estimate of the accounts’ worth in 2010.

Using that number, you can estimate what the conversion taxes will be for 2011 and 2012 and begin planning to set aside those monies today.

I don’t think its reasonable to assume everyone is going to be able to do a full conversion, but by taking a closer look at the numbers you’ll be able to see what conversion amount is right for you. I will be adding financial calculators and hypothetical scenarios soon to take most of the guesswork out of it.

Lets take a look at an interesting second option…

A savy way to backdoor into a Roth IRA

Between 2007 and 2010 there’s a way for some of you to “backdoor into a Roth IRA”, and then convert it to a true Roth IRA in 2010. To be clear, there is no account called a ‘backdoor Roth.’ I’m using this slang term to describe the process of making a nondeductible IRA contribution to a regular IRA, earmarked for conversion in 2010.

If you are an active participant (making annual additions or accruing a benefit) in a company plan and make more than $63,000 as a single taxpayer in 2007 (or $103,000 as a married joint taxpayer) you can’t take a deduction for any IRA contributions you may make. But you can utilize this sweet backdoor move.

A nondeductible contribution earmarked for conversion

If you fall into the above category (which many do) you can make a nondeductible contribution to a regular IRA. As much as I don’t like non deductible IRA contributions, if the intent is to convert to a Roth in 2010 then this is a good idea.

Because these contributions have been non deductible, when it comes time to converting to a Roth, you would only owe taxes on the earnings. This ‘backdoor’ strategy works perfect if this is your only IRA.

If you have other IRA’s, such as a pre existing deductible account or a rollover from a company plan, then you have to factor in those funds when converting to a Roth in 2010. In this case, the portion of your converted amount that escapes taxes is based on the ratio of non deductible contributions to the total balance in all of your IRA’s.

For example, if your IRA balances total $30,000, of which $15,000 comes from non deductible contributions, then 50% of any conversion is TAX FREE.

As tax rates rise, which many pundits think is likely, the implied value of owning a Roth IRA will skyrocket…

Tags: 2010 Roth IRA Conversion Event, backdoor Roth IRA, Featured, Roth IRA Conversion