LI Sound Grunt

Hers is the scoop. 2 years ago I opened an IRA for my wife then found out we were not eligible for the tax deduction due to making over 100,000 jointly - or whatever the cap was. No problem - we just did not take the deduction but still have the Fidelity account. Now I understand the rules have changed - there is no more income ceiling to take the deduction- up to 3500 or 4500 or whatever. So can I now just take the deduction for my 2010 taxes - or what do I have to do- close out the old account now and open one in 2010 when the new rules take effect?

Also why would I want to convert this to a Roth IRA instead of the traditional - I do not plan on ever having to get at this money - hopefully it can go to my kids when I go....(or is this a bad idea)

Thanks

Financially challenged Bob

(is my THT Financial advisor SPROCKETS out there?)

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Sprockets

When you made the contribution 2 years ago, you should have completed Form 8606 when you did your return, designating the contribution as non-deductible. You can't deduct it in 2010. The key is how you treat it when you eventually take it out. If it was properly designated as non-deductible, it would be considered "basis" in the IRA, and you would not be taxed on that amount when you take it out. I have several clients who did not properly designate in the past, and with a little research we brought them up to date and continue filing the 8606 each year.

The major change for 2010 is the ability to convert a traditional IRA to a Roth, regardless of your income. In addition, the tax can be paid over 2 years. There are a lot of variables that determine whether it makes sense to do this. Most important is whether someone can pay the tax with money outside the IRA. Also important is your age, as the younger you are the more it makes sense. The reason for this is that the money can continue growning longer after you pay the tax. Another issue is that if you won't need the IRA money in retirement, there are no required distributions when you hit 70 & 1/2.

Lot's to think about. You may want to check Fidelity's website to see if they have a calculator or utility to help decide whether it makes sense.

PM me if you need to bounce something specific off me.

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LI Sound Grunt

Thanks Sprockets!!!

I will get one of those 8606s in ASAP and check the Fidelity web-site. So sounds like the rule change is just for the conversion to Roth scenario - therefore there is no elimination of the income limit for the traditional IRA deduction - got it!

Very helpful as always!!

__________________
1st Cav Div Air Assault Infantry RVN
-Can Do........ and .......Carry On -