2010 tax change ends Roth IRA worries

Dear Dr. Don,
I'd like to open a Roth IRA account, but our 2007 adjusted gross income (AGI) is too high due to liquidating a large block of stock we used as a down payment on a house. Normally, we would be below the income threshold.

Can I still open an account this year? In the years to come, if limits on Roth IRAs are not raised, we'll eventually be above the threshold again. Does this mean in those years we can't continue to contribute to an existing Roth IRA?
-- Todd Taxes

Dear Todd,
Your ability to contribute to a Roth IRA account in 2008 is based on your income in 2008, not your income in the 2007 tax year. Here's what IRS Publication 590, Individual Retirement Arrangements, says about the contribution limits for 2008.

Modified AGI limit for Roth IRA contributions increased. 
For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations.

• Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159,000. You cannot make a Roth IRA contribution if your modified AGI is $169,000 or more.
• Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008 and your modified AGI is at least $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more.
• Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

Thanks to a change in the tax code, in 2010, the income restrictions are eliminated for Roth IRA conversions, but remain in place for Roth IRA accounts. You will be able to convert traditional IRA balances into a Roth IRA.

It's not a substitute for professional tax advice, but the Bankrate feature "7 steps to a 2010 Roth IRA conversion" will help you with the decision of whether or not to convert into a Roth IRA.