Roth IRA changes: conversions in 2010 and beyond.

• Author: Kay Foss, Mary
• Position: EstatePlanning

While similar to a traditional IRA, a Roth IRA distinguishes itself in that contributions aren't tax deductible and may be made after age 70.5; distributions of earnings are tax free once the account is five years old (other requirements may apply); and no minimum distributions are required during lifetime, but required minimum distributions begin after death for non-spouse beneficiaries.

Roth IRA Contributions

As of Jan. 1, 1998, an individual who meets the income limitations can make an annual nondeductible contribution to a Roth IRA up to the excess of the lesser of $5,000 currently or 100 percent of the individual's earned income, minus the aggregate amount of contributions for the tax year to all other individual retirement plans (other than Roth IRAs or employer contributions to Simplified Employee Pension and Simple IRAs) maintained for the benefit of that individual. An additional $1,000 (formerly $500) "catch up" contribution is allowed for a person over 50.

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Unlike a traditional IRA, there is no age limit for Roth contributions. Individuals over age 70.5 with earned income may contribute for themselves and for a nonworking spouse if income limitations are met. Earned income is defined in the same way as for traditional IRA contributions, thus taxable alimony and separate maintenance payments will qualify.

Participants in Sec. 401(k) and 403(b) plans can participate in Roth versions called Designated Roth IRA Accounts (DRACs). Income tax deductions (or income exclusions) will not be available for contributions to these plans, but the amounts will grow tax-free.

Taxpayers who qualify for an IRA must determine' if they are better off using a tax deductible or nondeductible retirement vehicle. It's possible to split the maximum contribution between a Roth and a traditional IRA (either deductible or nondeductible), but the added complexity may not be worth dealing with. Similarly the maximum DRAG contribution can be split with a Sec. 401(k) or 403(b) deferral.

Employees covered by an employer plan are not precluded from contributing to a Roth. Individuals covered by a Keogh, SEP or SIMPLE IRA also qualify for Roth contributions.

The income limitations prohibit participation by many interested taxpayers. A single person or head of household qualifies for the maximum Roth IRA contribution when 2010 modified adjusted gross income is $105,000 or less. A partial contribution is allowed when the modified adjusted gross income is greater than $105,000 and less than $120,000.

Joint return filers need less than $167,000 of 2010 modified adjusted gross income to make the maximum contribution. If the limitation is met, both spouses can contribute the maximum. When the modified adjusted gross income exceeds $177,000 no contributions can be made; a reduced amount is allowed between $167,000 and $177,000.

Married couples filing separate returns...