2010 Traditional IRA Conversion Loophole

The 2010 Traditional IRA Conversion loophole is the convenient name given to a part of the Pension Protection Act of 2006 that lifts the $100,000 income restriction on Traditional IRA conversions. Understanding it allows those earning more than than the Roth IRA income phaseouts to contribute to a Roth IRA.

The Roth IRA income phaseouts state that a single filer that earns between $101,000 and $116,000 in 2008 will not be able to contribute the full $5,000 towards their Roth IRA. However, the 2010 loophole presents an opportunity.

There are no income phaseouts for the Traditional IRA. Contributions to a Traditional IRA are usually income tax deductible, meaning you don’t pay taxes on contributions, and share the same contribution limits as the Roth IRA. In many instances, such as if the contributor has the option of participating in a 401k or similarly structure retirement, the contribution cannot be deducted.

Here’s the loophole. Contribute to a Traditional IRA, don’t deduct it from your taxes, and then convert it, mostly tax free, to a Roth IRA when the $100,000 income limit is lifted. This turns your Traditional IRA into a Roth IRA, all in one fell swoop.

It is important that you create a separate Traditional IRA account, one separate from any other IRAs, for bookkeeping purposes. Then, in 2010, convert it over. If you start mixing funds, the paperwork increases and the headaches do as well.

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