You may have read about some of the benefits of a Roth IRA, which includes tax-deferred growth, tax-free distributions, and no required minimum distributions (RMD) for the owner. 

Perhaps you have considered converting your Traditional, SEP and/or SIMPLE  IRAs to a Roth IRA so you could take advantage of those benefits. The problem is, though, if your modified adjusted gross income (MAGI) income is over $100,000 or you are married and file separately, you are ineligible for a Roth conversion.

The tax bill, Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), will change that problem in a few years and will give you a reason to look at an option that has been unattainable for high income earners.

TIPRA Becomes Law
President Bush signed TIPRA into law on May 17, 2006. This tax bill includes a provision dealing with converting Traditional IRAs to Roth IRAs. Starting January 1, 2010, the existing income and tax-filing tests for Roth conversions will no longer apply. Further, investors who convert in 2010 can spread the taxes over two years, 2011 and 2012, and thereby receive what amounts to an interest-free loan from the IRS, to be repaid over a two-year period.

Then, of course, after that the Roth IRA's gains will accrue on a tax-deferred basis, and will be tax-free if distributions are qualified. (To read more about TIPRA, see Recent Legislative And Other Updates and Tax Treatment Of Roth IRA Distributions.)

What You Can Do Now

Maximize Your Non-Roth IRA Contributions
Put as much as you can into your Traditional IRA or employer sponsored plan such as a SEP IRA, SIMPLE IRA, 401(k) or 403(b) plan. The accumulated balances can then be converted to a Roth IRA in 2010. Of course, for 401(k) and 403(b) plans, your must meet the withdrawal-eligibility requirements as specified under the plan in order to convert those assets to a Roth IRA. (To continue reading about employer-sponsored plans, see Supplementing Your Retirement Income With IRAs, Making Salary Deferral Contributions - Part 1 and Are You an Active Participant?)

Look At The Nondeductible IRA
If your MAGI prevents you from making Roth contributions, a nondeductible IRA is the next best choice. You can make a nondeductible contribution, providing you have eligible compensation and you are under age 70.5 for the year the contribution is being made. You can put away up to $4,000 ($5,000 if you are age 50 or older) each year or $8,000 ($10,000 if both you and your spouse are 50 or older, to each of your IRAs) if you are married and file jointly. These contributions can really add up over time.

As a hypothetical example, consider a married couple (each age 50) that invests $10,000 ($5,000 to each Traditional IRA) every year until age 65. Assuming an 8% average annual return, they'd end up with another $293,242 in their nest egg. They could then convert those accounts to a Roth, only owe tax on the growth of $143,242 ($293,242 - $150,000 = $143,242), and not have to worry about required minimum distributions or paying any more tax on those funds. (To learn more about RMDs, read Preparing for the RMD Season - Part 1, Strategic Ways To Distribute Your RMD, Avoiding RMD Pitfalls and An Overview Of After-Tax Balance Rules.)

Get Ready For The Tax
If you want to take advantage of this new legislation to convert a large amount of funds to a Roth IRA in 2010, now is the time to plan. Start putting aside money outside your IRA and employer-sponsored plans to pay the conversion taxes. Estimate how much that tax might be.

For instance, imagine that your Traditional IRA is worth $100,000. By the time 2010 rolls around this could go up to $136,000 assuming an 8% return and no additional contributions. Then you'll have 2011 and 2012 to declare that $136,000 income and pay the tax. At the 28% tax bracket, the $38,000 tax could be spread over the two years. After that, you or your loved ones would never have to pay tax on qualified Roth IRA distributions - no matter how much it grows.

On the other hand, allowing the money to remain in a Traditional IRA could mean that you or your beneficiaries might have a bigger tax bill to face in the future.

Figure 1

Gambling on Political Risk
This tax law provision was designed to be a short-term fund-raiser for the U.S. Treasury in 2011 and 2012 as billions of dollars are likely to be transferred into Roth IRAs. Some politicians, however, are critical because it will cost billions in lost tax revenue in the future when withdrawals from unconverted IRAs would have been taxed. Consequently, what will happen in Washington between now, 2010 and beyond is anyone's guess.

However, even if this provision falls off the books and you have implemented the above steps, you will have put aside a pile of money that you might not have otherwise invested for retirement.

To continue reading on recent retirement plan changes, see The Pension Benefit Guaranty Corporation Rescues Plans, Pension Protection Act Of 2006 Becomes Law and The Pension Bill: A Wolf In Sheep's Clothing.

by George D. Lambert, (Contact Author | Biography)

George D. Lambert is a freelance financial writer with more than 20 years of experience in the financial services industry. He has worked as a Certified Financial Planner, a Certified Divorce Financial Analyst and an arbitrator for the NASD, NYSE and AAA. George is approved by the Florida Licensing Education Section to instruct life, health and variable annuity courses. To read more about George and his services, visit www.e-financialWriter.com. Also be sure to check out his latest book, "A Boomer's Guide To Long-Term Care".

If you have questions about George's articles, please check his blog (http://e-financialwriter.blogspot.com/) before emailing him.