Dear Dr. Don,
We are not qualified for either the traditional or Roth IRA annual contribution because our income exceeds the eligibility limit. Can we make a nondeductible IRA contribution this year and thereafter convert to a Roth IRA, as there is no income limit for conversion this year? If the answer is yes, what is the maximum dollar amount?
— Mark Maximum

Dear Mark,
If you have the taxable compensation to contribute and are under age 70½ by the end of the year, you’re eligible to contribute to a traditional IRA up to the contribution limits for the account, or the amount of taxable compensation, whichever is lower.

The contribution to the account, however, may not be tax deductible. In that case, you’re funding the account with after-tax dollars.

IRS Publication 590, Individual Retirement Arrangements, says the same:

Who Can Set Up a Traditional IRA?
You can set up and make contributions to a traditional IRA if:

  • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
  • You were not age 70½ by the end of the year.

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan.

After funding the traditional IRA, you can convert the account to a Roth IRA. Starting in 2010, there are no income limitations on who can convert, although there are still income limitations on who can contribute to a Roth IRA.

The Bankrate feature “2009-10 retirement plan contribution limits” provides the information you need in funding these accounts.

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