There are currently two ways to fund a Roth IRA – you can contribute directly, or convert all or part of a traditional IRA to a Roth IRA.

Generally, you can contribute up to $5,000 to an IRA in 2008, whether it is traditional, Roth, or a combination of both. This amount increases to $6,000 if you’re age 50 or older. But your ability to contribute directly to a Roth IRA depends on your “modified adjusted gross income,” or MAGI.

If you file single/head of household, you can’t contribute to a Roth in 2008 if your MAGI equals $116,000 or more.

If you file married filing jointly, you can’t contribute to a Roth if your MAGI equals $169,000 or more.

If you file married filing separately, you can’t contribute to a Roth if your MAGI equals $10,000 or more.

Regardless of your MAGI, you can convert an existing traditional IRA to a Roth IRA, but, you’ll have to pay income tax on the taxable portion of your traditional IRA at conversion.

If you’re married filing separately, or your MAGI exceeds $100,000, you currently aren’t allowed to convert a traditional IRA to a Roth IRA.

The Tax Increase Prevention and Reconciliation Act (TIPRA) of 2006 allows taxpayers, regardless of your filing status or income, to convert a traditional IRA to a Roth IRA.

However, this provision doesn’t take effect until 2010. But, there are steps you can take now if you want to maximize the amount you can convert in 2010. Simply start making the maximum annual contribution to a traditional IRA, and then convert that traditional IRA to a Roth in 2010.

Remember that deductible contributions to a traditional IRA may be limited if you or your spouse is covered by an employer retirement plan and your income exceeds certain limits.

But any taxpayer, regardless of income level or retirement plan participation, can make nondeductible contributions to a traditional IRA until age 70 and a half.

And because nondeductible contributions aren’t subject to income tax when you convert your traditional IRA to a Roth IRA, they make sense for taxpayers considering a 2010 conversion, even if they’re eligible to make deductible contributions.

SEP and SIMPLE IRAs can also be converted to Roth IRAs. Consider maximizing your contributions to these plans now, and then converting them to Roth IRAs in 2010.

If you’ve made only nondeductible contributions to your traditional IRA, then only the earnings will be subject to tax at conversion.

The IRS has proration rules that apply to Roth conversions consisting of both deductible and non-deductible contributions.

One way to avoid the prorating requirements is to first roll over all of your taxable IRA money. This will leave only the nontaxable money in your traditional IRA, which you can then convert to a Roth IRA tax free.

Even if you have to pay tax at conversion, TIPRA allows you to make a conversion in 2010, and report half the income from the conversion in 2011 and the other half in 2012.

In 2008, you can roll over your employer 401(k) plan distribution directly to a Roth IRA. You’ll still be subject to income limits for 2008/2009 and you’ll still need to pay income tax on any taxable dollars rolled over.

So, is a Roth IRA right for you? The answer depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, state tax laws, and how you’ll pay the income taxes due at the time of conversion.

Consult your friendly home town banker to help you determine if opening or converting to a Roth IRA will benefit you now and in 2010.





– Hayes Parnell III is the chairman and founder of Covenant Bank.