Talking Roths

I work in an industry where many of my colleagues, and clients for that matter, are self-employed. While it's nice to not have to answer to a boss or wear a suit and tie every day, many of us are not eligible for an employer-sponsored plan such as a 401(k) or a 403(b). While SEP-IRAs are an option for some of us, the Roth IRA is the investment vehicle I often suggest to people.

Some people are "fortunate" enough to make "too much money" ($114,000 if you file as single, head of household or married filing separately and did not live with your spouse during the year) where they are excluded from participation in a Roth IRA plan. Those people should pay serious serious attention to the year 2010. During that year, and that year alone, there will be NO income restrictions. An article I obtained from Business tax Recovery breaks it all down:
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Roth IRA Income Limits
An odd quirk in the recent legislation to extend the Bush Tax Cuts is giving IRA holders a huge break. For one year, and one year only, the Roth IRA income limits will not apply.

Roth IRA Income Limits
2010 may seem like a long way off, but something magical is going to happen then if you prepare for it. The recent legislation extending the Bush tax cuts contains a unique clause regarding the Roth IRA income limits. Specifically, it contains language that makes the Roth IRA available to anyone regardless of their income, but only for one year.

A Roth IRA is a retirement account that offers a lot of advantages. The primary advantage is found in the distributions from the account. Simply put, they are tax free if a couple of requirements are met. First, the distributions must be made after you pass the age of 59 years and six months. Second, you must have owned the Roth IRA for at least five years. If you meet this test, the money is yours free and clear including all the gains you have made from your investments over the years.

The only criticism of Roth IRAs has to do with income caps. Simply put, a person with a modified gross adjusted income of $100,000 or more cannot convert an existing IRA to a Roth. While many people fall below this Roth IRA income limits, those that were just over it certainly have had a beef.


In an effort to extend his tax cuts, the President agreed to a number of oddities in the new tax legislation. One of the strange clauses is a single year cap exemption. In 2010, the income cap of $100,000 will not apply to the Roth IRA. Put in simple terms, you can convert to a Roth in 2010 regardless of how much you make. You can only do it in 2010, not 2009 or 2011.

There appears to be no reason why the politicians would create a one year exemption to the Roth IRA income limits. It certainly seems a bit fishy, but you might as well take advantage of it. While 2010 seems far off in the future, it gives you time to plan any conversion. Remember, if you convert a traditional IRA to a Roth, you must pay taxes on the moved money. If at all possible, you will want to do this with cash you save between now and then. The more money you can cram into a Roth, the better off you will be in the end.
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Now you know :-)