IRA Conversion Income Limits

Individual Retirement Accounts (IRAs) and Roth IRAs both offer tax advantages when you put away money for retirement. The IRS limits how much you can contribute to either kind of IRA in a given year. In the past, if you wanted to convert an IRA to a Roth IRA, the IRS ruled out such transfers if your income exceeded a certain amount; that rule changed in 2010.

Types

• With a traditional IRA, contributions you make to the account aren't considered taxable income, according to the IRS. You won't pay taxes on your contributions or on any interest the account earns until you withdraw the money later. With a Roth IRA, it's the other way around: You pay taxes on money you put in, but withdrawals are tax-free. To contribute to either type of account in a given year, you must have received income from your work.

Size

• You can't just shovel money into a traditional IRA or Roth IRA, according to the IRS --- there are limits to how much you can contribute in a given year, and the higher your income, the stricter the limits. With a Roth, you can't contribute at all if your income tops a certain level; with a traditional IRA, a high income reduces both the amount you can contribute in a given year and the amount you can contribute tax-free.

Time Frame

• You have to start your traditional IRA when you're younger than 59 1/2, the IRS states; if you withdraw any money before that age, you pay taxes and a 10 percent tax penalty on that money. After age 59 1/2, you can make regular withdrawals; after 70 1/2, you have to make a mandatory minimum withdrawal every year. With a Roth IRA, you can start the account at any age and there's no minimum withdrawal required; you can even leave the money untouched and let your heirs make the withdrawals after your death.

Considerations

• Up until 2010, if you wanted to transfer the contents of your traditional IRA into a Roth --- a "conversion," in IRS terms --- the IRS had an income limit for that conversion. You couldn't convert your IRA if your adjusted gross income --- your taxable income on Form 1040 before you claimed any deductions or exemptions --- was more than $100,000. As of 2010, there's no income limit on conversions. While IRA owners may believe this is a one-year exception, CNN states that the income limit has actually been suspended for good.

Effects

• If you made tax-exempt contributions to your traditional IRA, you have to pay income tax on them --- but no tax penalties --- when you convert to a Roth. If some of your traditional IRA contributions were taxable, however, you won't have to pay tax on that portion of the account when you convert.

Considerations

• Whether converting an IRA makes sense depends on how you see your financial future, the Charles Schwab investment website states. If you think your income and tax bracket will be higher when you start withdrawing from your IRA than it is now, the Roth might be the better decision; if you're thinking of leaving it as an investment for your children, a Roth is definitely the right choice.