Wednesday, February 6, 2008

IRA changes in 2008

Vanguard sent me a letter that nicely lays out the legislative changes to IRAs for 2008. Some of these are the result of the Pension Protection Act of 2006.

Direct non-Roth 401(k) to Roth IRA rollovers

Previously, you could roll over a non-Roth 401(k) to a traditional rollover IRA, and then convert the traditional rollover IRA into a Roth IRA. Now you can skip the step of having to roll over into the traditional rollover IRA, and roll over and convert at the same time. There are still tax consequences from converting the pre-tax non-Roth 401(k) into the post-tax Roth IRA. There are income limits of $100,000 as well. More details can be found in the IRS publication, Notice 2008-30.

Q-1. Can distributions from a qualified plan described in § 401(a) be rolled over
to a Roth IRA?

A-1. Yes. The rollover can be made through a direct rollover from the plan to the
Roth IRA or an amount can be distributed from the plan and contributed (rolled over) to
the Roth IRA within 60 days. In either case, the amount rolled over must be an eligible
rollover distribution (as defined in § 402(c)(4)) and, pursuant to § 408A(d)(3)(A), there is
included in gross income any amount that would be includible if the distribution were not
rolled over. In addition, for taxable years beginning before January 1, 2010, an
individual can not make a qualified rollover contribution from an eligible retirement plan
other than a Roth IRA if, for the year the eligible rollover distribution is made, he or she
has modified adjusted gross income (“MAGI”) exceeding $100,000 or is married and
files a separate return.
I won't be doing this anytime in the future, for tax diversification purposes.

Starting in 2010, anyone can convert a traditional IRA (or 401(k)) into a Roth IRA

This year and in 2009, your MAGI, as described above, has to be $100,000 or less to do a traditional to Roth conversion. That limit goes away in 2010. I do plan on doing this in 2010. I feel my traditional, non-Roth 401(k) assets are enough to keep me tax diversified. I'll eventually write a post on how I'll be doing this, as I've been planning it since the laws changed in 2006.

Traditional and Roth IRA income limits increase

The income limits for full deductibility of a traditional IRA increases to $53,000 for single filers and $85,000 for joint filers. The income limits for full contributions to a Roth IRA increases to $101,000 for single filers and $159,000 for joint filers.