Questions and Answers

Did I hear this right? Can an IRA owner make a nondeductible traditional IRA contribution for each tax year through 2009 and convert to a Roth IRA in 2010 and pay taxes only on the earnings?

Previously nondeductible contributions are nontaxable upon conversion to a Roth IRA. Only the earnings on such contributions are taxable. This may make nondeductible traditional IRA contributions more attractive to both those individuals who currently make more than the $100,000 modified adjusted gross income (MAGI) limit on conversions, and to those whose MAGI exceeds the limits for making Roth IRA contributions.

However, when determining the taxable amount of a conversion, an individual must take all of his/her traditional IRAs into account, including any previously deductible contributions and any contributions made prior to the law change the eliminates the MAGI limit for conversions starting in 2010. An IRA owner should seek the guidance of his/her tax professional regarding these rules.

(Posted: 09/05/2007)