One is precluded from making new contributions to a Roth IRA if modified AGI (adjusted gross income) exceeds certain thresholds. In 2009, no contributions can be made for example if a married filing joint couple’s modified AGI exceeds $176,000 ($177,000 in 2010) or if a single filer’s modified AGI exceeds $120,000 (same in 2010).

Through 2009, singles and married joint filers have been precluded from converting traditional IRAs to Roth IRAs when modified AGI exceeds $100,000. However, as a result of TIPRA (the Tax Increase Prevention and Reconciliation Act of 2005) enacted in May 2006, the $100,000 modified AGI requirement is eliminated in 2010. Note that modified AGI limitations still apply to annual Roth IRA contributions. Conversion of a tax-deferred traditional IRA to a Roth IRA has taxable consequences since it is treated as a distribution and a taxable event.

The TIPRA enactment made a special provision for conversions made during 2010. The owner of the traditional IRA has the opportunity to be taxed fully in tax year 2010 only or instead to be taxed one half each for tax years 2011 and 2012 respectively. Planning Tip: Due in part to the compounding benefit of tax-free distributions, if possible, owners should seek to pay the tax due on any conversion with non-IRA funds. This will enhance the value of the new Roth account and offer the greatest opportunity to increase the amount that is growing tax-free

In 1998 Congress created the Roth IRA, designed to permit both tax-free growth and tax-free principal distributions for retirement. Although the Roth IRA does not afford any tax deduction for contributions, accounts may grow tax-free without mandatory required minimum distributions by the account owner even after reaching age 70 ½ (a requirement for traditional IRA owners is to take minimum distributions after reaching 70 ½).