Roth IRA conversions aren’t off limits to six-figure earners anymore. Starting in 2010, you can convert a traditional IRA to a Roth regardless of your income. Previously, such conversions were permitted only in a year in which your adjusted gross income (AGI) didn’t exceed $100,000.
Why would you want to convert to a Roth? It’s a good idea for many retirement savers. Unlike withdrawals from a traditional IRA, which are taxed as income, “qualified distributions” from a Roth that has been established for at least five years are tax-free. And whereas a traditional IRA forces you to take taxable distributions during retirement, a Roth IRA has no mandatory withdrawals.
Of course, there’s no such thing as a free lunch. You must pay tax at ordinary income tax rates on the amount you convert from a traditional IRA to a Roth.
How well do you know the rules? Here are 10 questions to test your knowledge.
1. When are contributions to a Roth IRA tax-deductible?
a) Only when your AGI is less than $100,000
b) Only when you don’t have a traditional IRA
c) Only when you itemize deductions on your tax return
d) Never 2. The regular annual contribution limit for a Roth IRA is:
a) $2,000
b) $5,000
c) $6,500
d) Unlimited
3. A Roth distribution is not a qualified distribution if it’s made:
a) because of death or disability
b) after reaching age 59½
c) to pay first-time homebuyer expenses
d) to pay higher education expenses
4. When can you contribute to a converted Roth IRA?
a) Only when you don’t have a traditional IRA
b) Only when your AGI doesn’t exceed an annual limit
c) Only when you’re disabled
d) Never
5. After 2010, contributions to a traditional IRA:
a) will be subject to the old income limits for Roth contributions
b) will no longer be subject to mandatory distributions
c) will be eligible for conversion to a Roth IRA
d) will be taxable
6. The tax on a Roth conversion in 2010:
a) must be paid in full in 2010
b) must be paid in full in 2011
c) can be divided between 2011 and 2012
d) can be postponed indefinitely
7. What is the age limit for Roth IRA contributions?
a) 21
b) 59½
c) 70½
d) There is none
8. When can you undo a Roth IRA conversion?
a) Within one year
b) By your tax return due date
c) Only if your AGI is less than $100,000
d) Never
9. A Roth conversion is valued for tax purposes on:
a) the date of conversion
b) your tax return due date
c) the last day of the prior year
d) the first day of this year 10. How often are Roth conversions allowed?
a) Only one per month
b) Only one per year
c) Once in a lifetime
d) Unlimited
Answers: 1-d, 2-b, 3-d, 4-b, 5-c, 6-c, 7-d, 8-b, 9-a, 10-d |