A strange part of the new law that keeps the Bush tax cuts in place gives IRA holders a huge break. For one year and only one year, there will be no limit on income.
No Matter What Your Income Is, Switch to a Roth IRA in 2010
2010 may seem like a long way off, but if you get ready, something magical will happen then. The new law that extends the Bush tax cuts has a unique clause about the Roth IRA. Specifically, it says that anyone, no matter how much money they make, can get a Roth IRA for one year.
A Roth IRA is a type of retirement account that has many benefits. The main benefit comes from the money that is taken out of the account. To put it simply, they don't have to pay taxes if a couple of conditions are met. First, the payments have to be made after you reach 59 years and six months of age. Second, you must have had the Roth IRA for at least five years. If you pass this test, the money is all yours, including any gains you've made from investing over the years.
The only problem with Roth IRAs is that there are income limits. Simply put, a person with a modified gross adjusted income of $100,000 or more cannot change an existing IRA into a Roth. Even though a lot of people make less than this limit, those who were just above it were not happy.
In order to keep his tax cuts for longer, the President agreed to some strange things in the new tax law. One of the strange parts is an exemption from the cap for just one year. In 2010, the Roth IRA won't have a limit on how much you can make, so you can convert to a Roth no matter how much you make. You can do it only in 2010. You can't do it in 2009 or 2011.
There doesn't seem to be any reason why politicians would change the Roth IRA income cap for just one year. Even though it seems a little fishy, you might as well use it. Even though 2010 seems far away, it gives you time to plan any changes. Remember that if you move money from a traditional IRA to a Roth IRA, you will have to pay taxes on it. You should try to do this with money you save between now and then if at all possible. The better off you will be in the long run, the more money you can put into a Roth.
