Roth IRA Income Limits

An odd quirk in legislation to extend the Bush Tax Cuts  a few years back is giving IRA holders a huge break. For one year, the Roth IRA income limits will not apply.

2010 is just around the corner and some magical things are occurring in the retirement field. The legislation extending the Bush tax cuts contained 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.

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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.

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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 $120,000 for singles 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.

The capless conversion is a one time event that comes at a perfect time. Many taxpayers are carrying large losses this year, which can help offset the tax impact of actually converting to a Roth. These taxes play out over three years, so make sure you speak with a quality CPA to find out what this would mean for your specific situation.

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