Significance

• Because there are no longer any income caps on Roth conversions, a non-deductible traditional IRA may now be used as a vehicle for high earners who want to open a Roth IRA but exceed the IRS's income limits. As of 2010, a couple that is married, filing jointly and makes more than $167,000 does not qualify to make a full Roth IRA contribution. Single filers cannot earn more than $105,000. However, they can open a non-deductible traditional IRA and immediately convert the money to a Roth IRA.
  
  

IRA Types

• Roth IRA contributions are taxed, but once in the account, investment earnings are left to grow tax-free. When investors retire and take withdrawals, or distributions, from their Roth IRAs, they won't owe any taxes on the money. Traditional IRAs work the other way around; investors take a tax write-off for the money they contribute to a traditional IRA but pay income taxes on the distributions. Non-deductible traditional IRAs do not provide a tax credit--they simply shelter investments from taxes as long as they remain in the account.
  
  

History

• Before the 2010 loophole came into effect, a non-deductible traditional IRA tended to be a last resort for people whose income exceeded the IRS's traditional and Roth IRA limits. Investors could make a contribution to a traditional IRA and not take a tax write-off on the money. Though the distributions would also be taxed, the account's earnings would be tax-free as long as the funds remained in the IRA, providing investors with a limited tax shelter for retirement savings.
  
  

Benefits

• Normally, assets rolled over from a traditional to a Roth IRA are subject to income taxes, because traditional IRA contributions are tax-free but Roth contributions are not. But those who roll over a non-deductible IRA to a Roth IRA are not subject to taxes on their non-deductible IRA contributions, because they were taxed to begin with. However, they may owe taxes on any non-deductible IRA earnings that the account accumulated before the rollover.
  
  

Considerations

• Though the law no longer limits who may open a Roth IRA, the tax shelter is not a good fit for all investors. If you have one or more non-deductible traditional IRAs that have accumulated earnings, you must decide whether it makes sense to convert and pay your tax bill now, or keep the money where it is and pay taxes on your earnings when you retire. Young investors who have made a relatively small sum on their investments are probably the best candidates for a Roth conversion. Older investors who feel they are likely to be in a lower tax bracket when they retire might decide against a rollover.