Does Your Income Vary? Get Around Roth IRA Income Limits

In my post about Roth IRA conversions, commenter JT pointed out a good way to get around the Roth IRA income limits if your income varies from year to year. Simply put contribute to a non-deductible Traditional IRA, and wait until your modified AGI drops below the $100,000 limit to do the conversion into a Roth. Maybe you plan on going back to school or are cutting back your hours to stay home with the kids? Although the limits go away in 2010 anyways, it’s something to consider.

For example, in 2005 I made too much to fully fund my Roth (phase out) but I?d be making less than $100K MAGI (salary – 401k) in 2006, so before April 15th in 2006 I put the excess contribution (4000 – what I was able to contribute directly to my Roth) into a Non-Deductible IRA then did an immediate Roth Conversion (no taxes since there was no gain). Full Roth Contribution even though I was in the phase-out range?

An important note – when you do a Roth Conversion the IRS sees all of your traditional IRAs as a pool, so if you have a traditional IRA from a 401(k) rollover then the above trick doesn?t work since you will owe taxes on a portion of the money?

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