DAT Financial & Tax Service

Roth Conversions

High-income taxpayers: Convert traditional to Roth IRAs

If you have been shut out of a Roth IRA because of your income, you are now able to take advantage of these tax-free accounts, if you want to convert a traditional IRA to a Roth IRA.

Tax law change

Starting in 2010, most taxpayers-regardless of their incomes or tax-filing status-will be able to convert a traditional IRA to a Roth IRA. Before that only taxpayers with modified AGI below $100,000 could convert. (Important note: This does not impact income limits for opening and investing directly in a Roth IRA. For single filers, income limits in 2011-2012 for a full Roth IRA contribution ($5,000 if under age 50 and $6,000 if age 50 and older) are $107,000 and $110,000 in 2012. For joint filers, income limits are $169,000 in 2011 and $173,000 in 2012.

Plan now

1. Start funding traditional IRAs.

Since there are no income limits for a traditional IRA, high-income taxpayers can contribute to a non-deductible traditional IRA with the intention of converting it to a Roth IRA. The more money you have in a traditional IRA, the more you will be able to convert to a Roth IRA, so it may pay to sock away as much as possible.

While your traditional IRA contributions may not be tax deductible-because you have an employer-sponsored retirement plan, such as a 401(k), and your income is over phaseout levels-you can still make nondeductible contributions. Anyone with earned income can contribute up to $5,000 per year if under age 50, and $6,000 if age 50 or older. (Once you reach age 70 1/2, you are required to start taking distributions from a traditional IRA and can no longer add to the account.) You can make a 2011 contribution until April 15, 2012. And, as long as you keep a record on IRS Form 8606 of your nondeductible contributions, you can simply add to an existing IRA account. There is no need to create a separate non-deductible IRA.

2. Maximize contributions to qualified plans.

If you are currently participating in a workplace savings plan, such as a 401(k), and know you will be able to roll it over into an IRA because you are leaving the company or retiring-consider funding this account to the greatest extent possible before then. You will be able to roll it directly into a Roth IRA.

3. You may pay tax on the Roth IRA conversion.

When converting from a traditional IRA to a Roth IRA, you will owe income tax on any taxable portion (the growth) of the account balance.

4. Potential estate planning benefits of a Roth IRA.

People who inherit Roth IRAs also get favorable tax treatment, so converting a traditional IRA or workplace savings account to a Roth IRA may be a savvy estate-planning tool. Non-spouse beneficiaries must take distributions over their life expectancies but, unlike with a traditional IRA, they generally don't have to pay income tax on the withdrawals. When a spouse inherits a Roth IRA, he/she also has the additional option of rolling over the retirement account into his/her own Roth IRA.

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