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Across My Desk: Roth IRA

I'm been a big fan of Roth IRAs and have been since their inception. Why? Because I think that there's value in paying taxes before you invest your money rather than when you take the moola out. Plus, the fewer rules about how much to take out and when is a hassle no one needs.

What follows is recent article from Stimpson Communications about Roth IRAs:

"IRA "stuffing" -- a profitable way to fatten up for a Roth conversion. Plan ahead for unique 2010 opportunity.

Roth IRA advantages are so powerful, it's often worth it to convert some or all of your traditional IRA money to a Roth IRA--despite the tax you'll have to pay on the conversion amount.

Today both couples and singles who make more than $100,000 per year (modified adjusted gross income) cannot convert. But starting in 2010 this limit is removed completely, and even Warren Buffet can convert to the Roth.

On conversions you make in 2010 only, you can defer paying the resulting tax until the 2011 and 2012 tax years. "This provides a unique planning opportunity," says Jeremy T. Welther, CFP, a financial advisor with Brinton Eaton Wealth Advisors in Morristown, N.J.

What if you're making too much money* and can't contribute to a Roth or make deductible contributions to a traditional IRA? Welther recommends a technique called "IRA stuffing."

"Consider making nondeductible contributions to your traditional IRA in 2008 and 2009," he says. "This would allow you to fund a Roth IRA, via conversion, with more dollars than would be the case otherwise."

Everyone who earns money from work (and even a nonworking spouse) is eligible to make nondeductible contributions--in 2008 up to $5,000 per person, and $6,000 if you're 50 or older this year.

If you convert 100% of your traditional IRA assets, you won't pay tax on the amount of nondeductible contributions you convert. For a partial conversion, a prorated part of your nondeductible conversions are tax-free. Make sure you file IRS Form 8606 for any tax year in which you make a nondeductible contribution, Welther advises."

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