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 income cap will be gone. 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. 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 income cap, 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 cap. 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. |
