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Questioner: Alex

Question: Can I married couple filing jointly earning more than the maximum allowable income for a Roth IRA, be able to convert this year to a Roth IRA and contribute new money in the future? My understanding is that we can only convert to a Roth IRA but we’re unsure if we’re able to contribute new money going forward.

Can we for example, open a traditional IRA with $5,000 maximum, convert this year to a Roth IRA and therefore allow to have this money grow tax-free going forward? If we’re not allowed to contribute to this fund any more, are we then stuck with a portfolio where we contributed a maximum of $5,000?... Both my spouse and I could at least open 2 separate ones and have a couple of Roth IRAs that add up to $10,000. (This could grow to approximately $50,000 in 20 years time, assuming an 8% return).

We are currently saving in our 401K and have some money in a Savings 529 plan.
A Roth IRA would give us great flexibility, it could be used for our children’s education or it could be used as retirement funds for us as well.

Answer: Thanks for your question. Hope I can provide you a little assistance. The way that it stands now (2010), this is the only year where it does not matter how much income an individual and/or couple makes in order to convert a Traditional IRA to a Roth IRA. However, going forward (2010 and beyond) a couple or individual that are above the income phaseouts for Roth IRA contributions cannot make such contributions into their Roth IRA's. However, all is not lost. You can contribute into your employers Roth 401k which acts the same as a Roth IRA and you may make larger contributions than in a Roth IRA.

Depending on your age a Roth IRA makes perfect sense and provides tax diversification for future distributions. However, although it makes some sense for college funding combined with 529's, depending on your children age and what state you live in, I often recommend Prepaid Plans rather than those dependent on market performance. However, not all states have them. I am in Florida and recommend the Florida Prepaid Plans to residents of Florida.

I often say that you can postpone retirement, but its tough to postpone your childs education if the market takes a dip at the wrong time.

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