Currently people with AGI of $100,000 or more are not eligible to convert their traditional IRA to Roth. This income limit will be lifted in 2010, providing you a unique investment opportunity.
If you are a married individual filing jointly with your spouse, you are not eligible to contribute to Roth IRA if your combined income exceeds $176,000. If your income is between $166,000 and $176,000 the amount that you can contribute is proportionately reduced until it reaches $176,000. If the income is below $166,000, you are eligible to contribute the full $5000($6000 if you are 50 or older). This phase-out limits for single individuals are $105,000 and $120,000 for 2009.
Now, investing in Roth is quite advantageous to anyone and if your income is just above these limits, you are losing a golden opportunity. The 2010 Traditional IRA conversion opportunity gives us a useful loophole though. If you do not have a traditional IRA, you can set up a new one and contribute the full amount to it. In 2010, when you are eligible to convert it to Roth, you can convert the traditional account to Roth IRA in 2010 and bingo you have a Roth account. Better still, if you are not claiming a tax deduction for your contribution, you need not pay any conversion tax for the contribution amount.
This is useful if you do not own a traditional IRA now. If you already own one and it has a size-able amount built up in it, this trick may not be so useful. From what I have read, when you convert, you pay conversion tax on the full amount in all the traditional IRAs put together, not just the one you are converting.
To learn more about converting a Traditional IRA to Roth, see my article in suite101.com
