Roth IRA Loophole: Everyone Can Qualify in 2010

This is not really new news, but I thought it was interesting enough to share broadly. Since it’s about saving for retirement, hopefully some of you out there will get some benefit from this information.

Om May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). It’s very likely that this news didn’t really get your attention, but if you are an active saver for retirement, it should.

One of the best innovations for retirement savings in the last ten years has been the Roth IRA. The Roth IRA is an Individual Retirement Account, and like other IRAs, it is a special type of account with tax advantages to help people save for their retirement.

The magic of the Roth IRA is that it turns the tax liability for normal IRAs on its head. Most retirement accounts, like 401Ks and IRAs allow you to put money into the account, and deduct the contributions from your income. Your savings then gets to build, tax-free, until you retire. You think have to pay full income tax on the withdrawals.

This is a big benefit, and a great way to help save for retirement. However, the Roth IRA improves on this quite a bit.

With a Roth IRA, you do not get the deduction up front. In fact, you can only fund a Roth IRA with post-tax money. However, the magic is, once it goes in a Roth IRA, you will never pay taxes on it again – or the gains. For a young person in their 20s and 30s, this is an amazing way to accumulate wealth over the long term. Roth IRAs also have some tax benefits for estate planning.

Sounds good, right? In fact, there is only one big problem with the Roth IRA. It’s a benefit that isn’t available to people who make higher incomes. The limits of the program are that you must make less than $95K as an individual, or $150K married, to either contribute or convert an existing IRA to a Roth IRA.

Here’s where the loophole comes in.

As part of the tax act, Congress has officially abolished the income limits for Roth IRA conversion in 2010. That means you will able to convert existing IRAs into Roth IRAs, regardless of income. You can’t contribute to a Roth IRA if your income is too high, but you can convert an existing IRA.

“Great,” you say. “Hooray for 2010.” But this is where the loophole comes in.

You can start funding your regular, non-deductible IRAs this year, in 2006. You can continue to do this in 2007, 2008 & 2009. Then in 2010, you can convert all of these funds over to the Roth IRA. And since the non-deductible IRA is funded with after-tax money, you will only have to pay a small amount of tax on the conversion based on the gains from 2006 to 2010.

This is a fantastic window to convert a sizeable amount of savings into a Roth IRA, even if Congress only keeps this window open for one year.

Some people might ask, why would Congress offer this great incentive? Actually, it was done to help bring in revenue in the short term. This opening in 2010 will draw a lot of money into the Roth IRA program, which will generate a lot of taxes in 2010 as people convert their funds over. Because our government tends to only focus on the short term (5-10 years), this looks like a gain because the lower tax revenue from the Roth accounts doesn’t hit for decades.

Everyone’s financial situation is different, but if you’ve been interested in Roth IRA accounts, and you’ve been unable to participate, your window is now open.

Here is another article I found on the same topic.

Blogs I Read: Mac Mojo (The Microsoft Office for Mac Team Blog)

This is a relatively new one for me, but I find the posts pretty interesting from time to time.

This is the team blog from the group responsible for Microsoft Office for the Mac.  Most people don’t realize this, but Microsoft Office actually originated on the Mac, and despite all the conspiracy theories, the business continues to be a fairly large one for Microsoft.

For example, check out this post from yesterday about the size of the Microsoft Office for Mac codebase.  It shocked the hell out of me:

It’s all in the numbers… 

30 million lines of code.  For a suite of applications.  Unbelievable.

For those of you non-technical folks out there, this is a really big number.  I remember when it was revealed that Windows XP was approximately 40 million lines of code, and Sun had a field day pointing out that Solaris was only 7 million at the time.

In software, bigger is rarely better from a complexity or reliability standpoint.  This blog post explains some of the very human reasons why.

I personally have always believed that a complete rewrite is likely necessary from time to time with software applications, usually every 3rd to 4th major version or so.  The problem is, the economics so rarely support re-writing a codebase.  The time you spend rebuilding what already works could be spent on building new features, or fixing old ones.

In a small way, this legacy cost is what helps fuel the ongoing development of new applications, new companies, and new businesses.  It is always easy for the new entrant to “rebuild” what already exists.  This doesn’t make up for the incredible market advantage that the large players have, but it’s an interesting cost advantage that you don’t normally see in most industries.

Anyway, check it out.  Since I am a longtime Office for Mac user, I like seeing ongoing communication from their team to the community.

Blogs I Read: Good Morning Silicon Valley

This is actually a blog I’ve been reading since before there were blogs, and this was just a daily email sent out by John Paczkowski.

I don’t know why, but I just find John’s nose for news interesting, and his wry sense of humor engaging. Take yesterday’s post for example:

Ha ha! You fool! You fell victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well-known is this: nobody ever benefits from a Microsoft partnership except Microsoft!

I just find “The Princess Bride” reference hilarious, and of course, the coverage of Microsoft timely with the Novell Linux deal.

This is definitely one worth adding to your feed list, especially if you care at all about high tech and/or news from Silicon Valley. This blog is hosted by the SJ Mercury News, but it’s still worth reading.