Roth IRAs are opened up to everyone

Upper income retirement savers are about to get in on tax-free Roth IRAs beginning in 2010, due to a recently enacted tax law change. Roth IRAs promise completely tax-free withdrawals of principal and earnings in retirement, unlike traditional IRAs, whose withdrawals are taxed as ordinary income.

When Roths were established, upper-income married taxpayers with incomes over $160,000 were prohibited from contributing to a Roth, while taxpayers with incomes over $100,000 were prohibited from converting traditional IRAs to Roth IRAs. This was unfortunate since those with higher incomes were more likely to have assets to make contributions and were more likely to benefit in retirement from tax-free withdrawals since their income tax rates are often above average.

In May Congress eliminated income limits on the conversion of traditional IRAs to Roths beginning in 2010. Conversions still require that income taxes be paid on the amounts converted, but all growth thereafter in the Roths are forever free of taxation. Also, Roths can be used more effectively for wealth transmission to future generations, since they are not governed by the same rules that require traditional IRA holders to begin withdrawals at age 70.5.