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.

41 thoughts on “Roth IRA Loophole: Everyone Can Qualify in 2010

  1. Pingback: Psychohistory Reminder: April 17, 2007 is Your Last Chance to Fund a 2006 IRA «

  2. There is a huge problem with this strategy that very few people talk about. If you already have a traditional IRA, that amount will be included as a prorated portion of the amount converted in 2010. In other words, you are not only going to pay taxes on the gain from the nondeductible contributions from now until 2010. You are going to have to pay taxes on a prorated amount given whatever your total IRA assets are and the cost basis. Example — you contribute $5000 per year for 4 years in a nondeductible IRA. That amount grows to $25,000. This means there is $5000 worth of gain; however, you have another IRA that is made up of completely tax deferred assets (maybe from a rollover). Let’s say this is $80,000. This makes your total IRA assets $105,000 with a cost basis of $20,000. The proportion of cost basis to taxable gain is 19%. If you were to convert only the IRA that contained the nondeductible IRA contributions, you would still owe tax on 81% of the amount converted. Sorry to burst the bubble of joy for some folks out there.


  3. Todd,

    What you are saying makes no sense to me. Can you explain further? Surely the deductible IRA of 80,000 also has a cost basis. It makes no sense to calculate a percentage of gain from a single account across all accounts without using the cost basis of all accounts.

    There are a very large number of articles on this subject, and none of them mention calculating the cost basis in the way you describe. Can you cite the source that you are basing this opinion on?


  4. Adam,

    I will answer both issues you raised here.

    1. If the $80,000 IRA is deductible (whether from a rollover of a qualified plan or from contributions that were qualified as deductible), then there is no cost basis. Every dime distributed will be taxable at your marginal rate. I guess we could say that the cost basis is actually $0. 🙂

    2. I do not have the energy to look up the IRS pub. on this topic. Maybe I will if I get bored. Instead I will quote an article on

    “Consequences of a Partial Conversion
    If all of your contributions to your traditional IRA were deductible (or were rollovers from employer plans such as 401k plans), your partial conversion is fully taxable. The taxable amount is determined as of the date of the conversion. For example, if you transfer XYZ stock on December 15, the value of XYZ stock on that day will determine the amount of income you report from the partial conversion.
    If you made nondeductible contributions to a traditional IRA at any time in the past, and haven’t previously withdrawn the nondeductible contributions, then your partial conversion will be partly nontaxable. The rules that apply here are the same as for any distribution from a traditional IRA. You treat all traditional IRAs as a single IRA, so you don’t get a different result depending on which IRA you convert. You add up the total value of all traditional IRAs and also the total amount of nondeductible contributions to those IRAs to determine what percentage of the conversion amount is taxable. For example, if 60% of your IRA balance comes from nondeductible contributions and you convert $8,000 of that IRA, you’ll report $3,200 of income from the conversion (40% of $8,000).

    It would be nice if you could specify that you’re converting only the nontaxable portion. The rules don’t let you do that. ” — Kaye Thomas

    This addresses specifically what the issue is.

    I hope that helps. If you need anything else regarding this, feel free to email me. If I get really excited, I’ll try to find the actually IRS guidance on it.


  5. Great info…
    But what about 401K assests in general.

    What if instead of taking a roll over to my IRA, I rolled an old employer 401K into my new employer 401K?

  6. There are very few reasons to ever roll an old employer 401K into a new employer 401K instead of a separate IRA. An IRA can easily bring you lower expenses, more choices, and flexibility.

    If you had a 401k that was below $1000, it might make sense to just roll it to the new employer 401K because investment options are fairly limited below that amount.


  7. A major reason to consider rolling over one employer plan to another is the potential to access money via a loan. This is not something I would usually recommend, but it is a reason some people would find helpful.

  8. Todd,

    I’ve read IRS Pub 590 and this discussion and it seems that only amounts in pre-existing *Traditional IRAs* encumber the partial conversion strategy.

    Suppose I have made fully non-deductable contributions to Traditional IRAs starting in 2007. Then in 2010, I convert the balances in only these Traditional IRAs (call them *Set A*) to Roth IRAs.

    1. If one rolls over a 401k (funded with fully deductable employee contributions) to a new *rollover IRA*, is this new rollover IRA considered a Traditional IRA and thus affects the taxable amount during a partial conversion of only Set A to Roth IRAs in 2010?

    2. Are *SEP-IRAs* (funded only by fully deductable employer contributions) considered to be Traditional IRAs and thus affect the taxable amount during partial conversion of only Set A to Roth IRAs in 2010?

    3. If one performs a trustee-to-trustee asset transfer between a *401k* (funded with fully deductable employee contributions) to a pre-existing *SEP-IRA* (funded only by fully deductable employer contributions), is the SEP-IRA considered to be a Traditional IRA and thus affects the taxable amount during a partial conversion of only Set A to Roth IRAs in 2010?

    4. If one has a Traditional IRAs (made with fully deductable contributions) and rolls them over to an “eligible retirement plan” (IRS Pub 590, 2006, p.23) does this effectively escape the amounts in these now non-extant Traditional IRAs from affecting the taxable amount during a partial conversion of only Set A to Roth IRAs in 2010?


  9. John,

    I am not a tax professional, and so I think anyone interested in this particular loophole should have sufficient assets to pay for a consultation with a real tax professional. 🙂

    My best guess to your questions:
    I think that any IRA that is non-Roth is effectively part of your one “traditional IRA” for this purpose. That would include SEP-IRA, Rollover IRA, and any other non-Roth variants.

    If you find an answer to these questions, please post them here!


  10. John, did you find out if your current 401K balance is used in the basis calculations? i.e. in this scenario:
    1) 401K account with $50000
    2) Traditional IRA with $10000 in deductible contributions (rollover from previous 401K).
    3) Another Traditional IRA with $8000 in non-deductible contributions made i.e. Basis = $8000. Assume no appreciation.

    i.e. total money in IRA + 401K = $70000

    Now, if I were to roll over all of (3) to a new Roth IRA account, would I pay no tax as Basis in this IRA = 100% of account value or tax on 1 – (8000/20000) = 60% of $20000 or would I pay tax on 1 – (8000/70000) = 88.6% of $20000?

    I wonder if Turbo Tax has a treatment on it. I will try it.

  11. If I want to take advantage of the 2010 Roth Conversion loophole but my income level is such that I am disqualified from opening a Roth in 2010, then would’nt it be a forgone conclusion that the loophole would not work for me?

  12. Not according to my information, Brian.

    From my understanding, the limit for conversion to Roth and contribution to a Roth IRA are not necessarily the same thing. I can’t verify whether or not the income limit in 2010 will be repealed for contribution, but right now, the income limit will be repealed for conversion.

    That being said, given the uncertainties around the 2008 Presidential election, there is more than enough time for a new President & Congress to repeal this loophole before it happens.


  13. I have a quick question-

    if I do not have an IRA or Roth IRA now – is it in my best interest to set up an IRA no and convert it to a roth in 2010. I make too much money to open a Roth IRA now


  14. Without knowing your specific situation, it’s hard to answer that question. However, if you believe that a Roth IRA would be beneficial to your situation, but you can’t fund it due to income limits, funding a non-deductible IRA now and converting in 2010 is the essence of the loophole.


  15. What about non-deductible IRA contributions made before 2006 when law was enacted? For simplicity, let’s assume the following scenario: A person makes $1000 contribution to a non-deductible IRA from 2005 to 2010. Assume no gains made during the period. In 2010, could the entire account balance be converted to a Roth IRA or would the $1000 contribution made in 2005 have to be left behind in the non-deductible (regular) IRA account?

  16. Hi Allen,

    I don’t think it matters when the assets were contributed – you can rollover any IRA to Roth if you qualify, regardless of when it was created or when you contributed to it.

    Consult a professional here to be sure, but the law seems to discuss conversion without regard to contribution date.


  17. Todd’s point was right. You cannot convert just post-tax IRA money.

    For example, I rolled my 401(k) to an IRA. Say it’s $100,000.
    I also have $25,000 in post tax IRA deposits over the past 6-7 years.

    If I convert in 2010, any money is treated as 80% pretax, 20% post tax money.
    I’d be better off stuffing that pretax IRA money back into my new 401(k) if the invest choices are ok. Either way, nothing is simple.


  18. Nothing is simple, as you say. Todd’s point was right, but the advice doesn’t change that much, but it does hinge on a couple of factors.

    If you have $90,000 today in pre-tax IRA, and you accumulate $10,000, post-tax, you can still convert a a portion of the money to Roth in 2010. True, you’ll owe a larger tax bill, but the advantages of the Roth IRA are still likely to be worth the conversion.

    This depends, of course, on your estimate of your tax rate in retirement.

    The good news is that 401(k) plans are not included in the IRS calculation. So, if like many people, you have pre-tax money in a 401(k), you can still create a post-tax IRA and do the conversion in 2010.

    Remember, however, the Roth IRA is definitely a bet on future tax rates. You end up paying tax today instead of when you retire, which only makes sense if your tax rate in retirement is higher than it is today.


  19. Wow!!

    I hadn’t checked the thread in a while. I love the fact that this got everybody’s gears a turnin’.

    A basical rule of thumb (and remember that my thumb is probably bigger than your thumb so there really are no rules) is to try to get your total retirement assets to look like the following:
    -30% taxable (nonqualified investments)
    -30% nontaxable (Roth IRA, Roth 401k, munis, cash value life, tax credit realestate, etc…)
    -40% tax deferred (pension, IRA, 401k, 403b, etc…)

    If your current pool doesn’t look like this because you have mainly been adding to your 401k (like almost everyone) and you cannot contribute to a Roth IRA, then a conversion may just be the cup of tea for you. Talk to a tax advisor.

    Take Care,

  20. Todd, my approach is less percent-goal than minimize tax goal.
    I wrote a long article analyzing this at my site and I’d offer this: A couple retiring today with over $400K in pretax accounts can manage withdrawals to stay at the 0% marginal rate. Nearly $800K is needed to have them in the 10% marginal rate.
    With the median net worth for retirees at about $150K, much of that in their home equity, the desire for post tax savings or Roths while working applies to a minimum number, the top 5 or so percent of retirees. Of course, my numbers are for the tax structure as it exists right now, but do you really fear the lowest brackets will go away? The talk is for the elderly to get the first $50K tax free. Well, it would take a million dollars or more to generate that withdrawal level.

  21. Joe,

    I pray for people that are only retiring with $400k in retirement assets. Actually, I pray for them and for me, because I know that the government will probably tax me more to help pay for the fact that so many people live for today and do not save enough.

    We are on a slow slide towards socialism. With 42 million households not even paying income tax, there are fewer and fewer people to shoulder the burden. I look for a tax on wealth to be proposed in the not-too-distant future. Imagine the beauty of it — “we will only tax those horrible rich people with $1 million in retirement accounts. And we will only tax that $1 million at 1%. And we will only do it this one time.” It is a bit like 1913 when our government adopted the income tax system and promised to tax the top 1% of earners only. Look where we are now.

    I think the real beauty would be if the government decides to keep making it attractive to save or convert into Roth-like accounts. They get all this great tax revenue now. Then they can pull a switcheroo and adopt a national sales tax or VAT. Then they could tax all the Roth income through your consumption. I shouldn’t talk about that too much. It might give them ideas.

    Sorry for the rant, but my point is basically that there is no way to really predict what our government is going to decide to do in the future. Since we really don’t know, we should try to diversify the way we “think” our asset growth will be taxed in the future. Put money into every bucket. Maybe then you will have at least some control.

    Rome fell when the people figured out they could vote themselves breads and circuses. I hope the people of the US wake up soon.


  22. If I convert all of my IRA’s to Roth IRS’s after January 2010 can I pay the taxes from other sources so that the Roth IRA can be converted at the full amount?

  23. Anthony – yes, you can use other funds. But before you do anything, run the numbers. See my prior post, and consider where you will be at retirement vs where you are now (I mean tax bracket).

  24. When doing a partial conversion, what is the thinking about which types of assets should remain in the traditional IRA and which types should be transferred to the Roth? Does it matter?

  25. So do I understand this correctly – a 401K balance that was placed into a rollover IRA will be eligible for conversion to a Roth in 2010 – regardless of income level?

  26. I stumbled upon this thread while Googling options to convert my old 401K into IRA to roll over to Roth in 2010. I do not quite entirely follow the nuances but basically am looking at the following: do I convert my 401K into a T-IRA now or wait until 2010 to convert to Roth or keep the money in the 401K? I make more than the current limit to invest in a Roth IRA today and do not have any other T-IRAs open.

    Any advice will be appreciated.
    Thanks for the great thread…it is one of the better ones that I have come across

  27. Roy – do you have any IRAs funded with post tax money? i.e. non-deducted IRAs? If so, you may want to wait a while. When you convert to Roth, the money not deducted will have no tax due, but it’s prorated along with T-IRA that were pretax. Make sense?

    Whether the conversion is right for you at all depends on a number of variables, current tax rate, current savings rate the larger factors.


  28. Joe, thanks for the response…no I do not have any IRAs funded with post tax money. I don’t have any IRAs today. There is some money in my old employer’s 401K that I want to rollover but unsure if that can be done now or in 2010. – Roy

  29. There are three questions:
    1) Can you roll from the 401(k) to a traditional IRA? Yes, and it’s usually a good idea to do so.
    2) Can you convert to Roth? If your MAGI (modified adjusted gross income) is less than $100K in 2008, you can.
    3) Should you convert? I’d look at your current marginal tax rate, and forecast future rates to decide. For many people, converting a bit each year to “fill in” the current tax bracket makes the most sense. I’ve written on my site about this a few times, The issue is certainly not black and white, a lot of thought must go in to this.


  30. Question: I rolled a $2000 401(k) into an IRA (1999). This money was lost. I have since contributed max possible money from 2006-2009. Lets say the recent contributions are even. My nondeduct contribution is ~$18,000 and my deduct contribution is $2000 but my total value is $18000. Do I still owe tax on the $2000 cost basis even though it is lost?

    Question 2: Is this IRA Roth Conversion only possible in 2010?


    • Tom –
      The $2000 pretax money that’s lost is gone. If the account is valued at $18,000, it doesn’t matter how much went in pretax, only post tax, that’s what’s tracked. If I read this right, your basis is $18,000 so no tax is due on conversion.

  31. My current 401K does not have a Roth option. I was told my options are to retire to distribute the money to a Roth 401K. How do you get money out of a 401K into a Roth in 2010?

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  33. 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.

    Your point above is interesting because most people did not make gains on investments from 2008 to 2009, in fact they lost a huge chunk of their investments. So in fact from your tax return for 2010, you would be declaring a capital loss on your non-deductible IRA investments from 2006 to 2010 (assuming you did incur a loss). Here’s a good example from

    According to the IRS, you have a tax loss from your traditional IRAs when the following conditions are met:

    * You liquidate all the traditional IRAs set up in your name.

    * Your total tax basis in the accounts — which equals the sum of your nondeductible contributions (if any) — exceeds the liquidation proceeds. Since you only get tax basis from nondeductible contributions, it’s fairly unlikely that you’ll have a tax loss even if you’ve lost your shirt. However, it can happen (as example 1 below illustrates)

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