Roth IRA question-income limits after 2010

I understand about being able to convert a regular IRA to a Roth IRA in 2010. That is not my question. My question is what happens after 2010. Let’s assume that I already have a Roth IRA. As I understand it, the income limits will continue but after 2010 you will be able to convert a funds from a regular IRA to a Roth IRA yearly. Therefore, to keep funding a Roth IRA, if your income is over the limit, you need to fund the regular IRA and then convert the funds to the Roth every year.

My problem is that I can’t predict how much my earnings will be. If I put money into a regular IRA and then convert the funds to my Roth after I calculate my yearly earnings, then I pay taxes on any gains. If it turns out that my income would have qualifies for the Roth, then I lose that money.

However, if I fund the Roth and then find that I don’t qualify, then do I have to roll the funds back into my traditional IRA and then do the conversion to get them back into the Roth IRA?

As far as I can tell, they never eliminated the income limits, just added this backdoor way of getting your money into the Roth? Am I missing something here?

You’ve basically got it right. There are different limits for conversions than for contributions. Starting with 2010, the limit is eliminated for a Roth conversion (that is, converting money already in a retirement account to a Roth). However, the income limits on new contributions remain the same.

If predicting your income is difficult, you can wait until after the end of the year to decide what to do - new contributions can be made for the previous year as late as April 15. I often recommend putting money in a couple of CDs throughout the year, timing them to mature in early April.

If you make the IRA contributions early and need to fix it, your bank (or whoever the account is with) should permit you to withdraw and move it around, provided that you do it before April 15.

My problem is that I don’t always know my income until I do my taxes. It’s definitely easier to just put it in the Roth and hope for the best (or worst as it would mean I didn’t make a lot of money), but will I be permitted to do the takeback to my regular IRA and then convert it back to the Roth? Why not just eliminate income limits on the Roth? It seems like such a hassle to transfer it out of the Roth and then transfer it right back in again.

I encourage my clients to come in during November for the specific purpose of estimating their income before the end of the year. It affects so many things, including eligibility for credits, that waiting until April to determine your income is never my recommendation.

I do know how difficult it can be to predict… there’s just no real way around that. And there’s no easy way to compensate for tax provisions until you do know. That’s why being able to move things around is the best I can do.

Don’t forget that there are limits on normal IRA contributions as well. Those limits are a little more generous than for the Roth contributions, but if your income is that hard to predict, you might not be safe making ANY IRA contributions. You also might benefit from some kind of SEP, SIMPLE, uni-401k, Roth 401k or defined benefits plan where income limits work in a totally different way (by linking the allowable contribution to a percent of income, they let you make bigger contributions as your income goes up, until you hit a maximum contribution).

I thought that there were no income limits for making nondeductible post-tax IRA contributions. Am I wrong?