A New Strategy for Roth IRAs 11/26/06

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A New Strategy for Roth IRAs 11/26/06

Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
A New Strategy for Roth IRAs 11/26/06

A New Strategy for Roth IRAs

“A New Strategy for Roth IRAs”



In this final installment of my series on IRAs, I’ll discuss the various rules that regulate IRA accounts, specifically Roth IRAs.  As you know, you do not receive a tax deduction for contributions to a Roth IRA but your earnings grow tax deferred and, most importantly, withdrawals made during retirement are tax free.  Unlike regular IRAs, you are never required to take Required Minimum Distributions (RMDs).  However, many beneficiaries of Roth IRAs mistakenly assume that as a beneficiary of a Roth IRA, they likewise are not required to take RMDs.  This is only true if you are the spouse.  Otherwise, you must begin taking RMDs based on your life expectancy prior to December 31st of the year following the year of death of the Roth IRA owner.  If you don’t do so, you’ll be subject to a 50% penalty on the funds you should have taken. 


Many people who have traditional IRAs have considered converting their accounts to Roth IRAs but haven’t done so because current law prohibits conversion if your adjusted gross income is greater than $100,000 (individual or joint tax return).  New legislation eliminates this income limitation in 2010.  Now 2010 may sound so far away that you are tempted to stop reading and head straight to the sports page…but wait!  There is a strategy you can begin implementing this year that will give you a head start on the 2010 Roth conversion and put a lot of money in your pocket.  Here’s what you can do:

  • Set up a non-deductible IRA and make the maximum contribution each year.  If you are under age 50, you can contribute up to $4,000 in 2006 and 2007; $5,000 in 2008 and beyond.  If you are age 50 or older, add $1,000 to these figures for ‘catch-up’ contributions.  A non-working spouse can also contribute to a non-deductible IRA.  Contributions cannot exceed your earned income; otherwise there are no income limitations.  Alimony is treated as earned income.
  • In 2010, convert your non-deductible IRA into a Roth IRA.  You will pay taxes on only your gains and even more importantly, you’ll have converted a large sum of money that will never again be subject to income taxes.


After 2010, continue to make maximum contributions to your non-deductible IRA and convert to a Roth IRA each subsequent year.  In effect, this strategy lets you get around the rules prohibiting contributions to Roth IRAs for taxpayers with income in excess of $160,000 ($110,000 for single filers).  This approach should only be considered in the context of an overall investment and tax plan so be sure to consult your financial advisor before implementing it.


Correction: In last week’s column, I incorrectly stated that a non-spouse beneficiary of an IRA who’s owner was over age 70 ½ must use the deceased owner’s life expectancy as the Required Minimum Distribution.  Congress changed the law allowing the beneficiary to use the longer of the beneficiary’s life expectancy or the deceased owner’s life expectancy.