2010 Roth Conversion: Loophole for Contributions?

With the impending changes to 2010 Roth conversion rules, a good deal of discussion has been centered around converting existing accounts, such as a Traditional IRA or 401(k), to a Roth IRA.

And while the elimination of the income limit for Roth conversions is certainly significant, a key point that has been sidelined in many discussions, though, is the continued existence of contribution income limits for the Roth IRA.

Starting January 1, 2010, anyone, no matter what their income, will be allowed to convert a pre-tax retirement account (Traditional IRA, SEP IRA, 401(k), etc.) to a Roth IRA. The previous $100,000 Modified Adjusted Gross Income (MAGI) limit will no longer apply to anyone wishing to convert.

Oddly enough, though, if you wish to make a normal contribution to a Roth IRA after January 1, 2010, you still must meet certain MAGI requirements. In 2010, married couples will need to keep their MAGI below $167,000 to make a full contribution to a Roth. Single filers must be below $105,000 to qualify for a full contribution.

Using the Conversion as a Contribution Loophole

What is to stop someone who doesn’t qualify for a contribution from making a contribution to a Traditional IRA and then immediately converting to a Roth IRA the next day?

It would seem, nothing.

The same would apply to a number of other tax-deferred retirement plans with much higher contribution limits, such as the SEP IRA, SIMPLE IRA or 401(k).

So with the elimination of the MAGI limit on conversions and the loophole of contributing to a non-Roth account and immediately converting, the Roth IRA will truly be open to anyone who wants one in 2010.

Be sure to check out 2010RothConversion.com to learn more about the upcoming changes and how they will affect you.

Filed under: 2010 Roth Conversion, IRA Contributions, IRA Education, Managing Your IRA, Roth IRA, Saving for Retirement, Taxes and April 15th, self directed IRA on November 13th, 2009

One Response to “2010 Roth Conversion: Loophole for Contributions?”

Rajeev Kotyan, on December 7th, 2009 at 7:13 am Said:

Wonder why the divergence in the rules, when one can do what has been stated… There is no tax benefit to the federal government, just added documentation to the taxpayer, and possibly the IRS…