Starting in 2010, there is no income limit on Roth conversions. But that has implications today. Until now, I've generally discouraged my clients with high income and company retirement plans from making non-deductible contributions to IRAs, since they get no deduction and eventually get taxed at top ordinary rates on withdrawals. No longer. They can make annual contributions of $4,000 per person ($5,000 if 50 or over) to a non-deductible IRA, then convert these assets to Roths in 2010, with virtually no taxes owed (except on the gains occurring between the date of the contribution and the date of conversion). And since the contribution limits rise to $5,000 in 2008 ($6,000 for the half-century crowd), a high income couple in their 50s might be able to add $44,000 to non-deductible IRAs over the next 4 years, then convert it all to Roths in 2010, owing taxes only on the amount by which those IRAs have grown above $44,000 (and the resulting income, even though it results from a 2010 conversion, can be allocated between 2011 and 2012, making the tax effect even less significant).
This means that, in effect, full annual Roth contributions can be made by everyone, including singles with income over $95,000 and marrieds with income over $150,000. Just contribute to a non-deductible IRA and convert the account to a Roth in 2010. Presumably, in 2010, a person could contribute to the non-deductible IRA and convert it to a Roth the next day with no taxes owed at all. Somehow, though, I suspect that either this possibility will be eliminated or, more sanely, the government will eliminate the income limits on Roth contributions so that no games have to be played. For now, though, it looks like people who make too much to contribute to Roths should strongly consider contributing to traditional IRAs, whether deductible or not.
Warning: This strategy only applies to someone who has no IRA at the present time. The government treats the conversion of any IRA to a Roth as a proportional conversion of all of the IRAs of that individual, so if a person has previously untaxed amounts in other IRAs, they will end up owing a lot more in taxes on this conversion than they expect. The IRS does not allow the taxpayer to designate that their conversions are coming from the non-deductible contributions.
