ROTH IRA & 2010 

Come 2010, Roth IRAs may become the retirement plan of choice for all Americans. That year, Uncle Sam will lift the income limits on Roth IRA conversions that have precluded taxpayers with modified adjusted gross income of $100,000 or more to convert their traditional IRA to a Roth IRA.

What's more, the government will even allow taxpayers the chance to report their conversions on their 2011 and 2012 tax returns, in effect giving Americans the ability to delay full payment of any tax due until 2013.

Roth IRAs, unlike traditional IRAs, are funded with after-tax dollars. And withdrawals from Roth IRAs, unlike traditional IRAs, are tax-free under certain conditions (after five years and after age 591/2). As with traditional IRAs, the money inside Roth IRAs grows tax-free. But one big difference between Roth IRAs and traditional IRAs is this: Roth IRA owners don't have to worry about required minimum distributions.

Taxpayers who qualify and who think they will be in a higher tax bracket when they are retired should consider Roth IRAs. Others should consider Roth IRAs if only because it gives them the ability to take distributions from either a traditional or a Roth IRA down the road, whichever might be more tax-efficient.

Savvy savers should start planning now for what could be the opportunity of a lifetime in regards to conversion, outlined five steps taxpayers can take now.

1. Reduce MAGI for conversions

The first order of business has to do with something called modified adjusted gross income or MAGI. Taxpayers who have MAGI over $100,000 cannot convert to a RothIRA in 2008 or 2009. But taxpayers who are able to bring down their MAGI below $100,000 just might be able to do a conversion now.

MAGI, for those, unaware, is regular adjusted gross income (the number reported on the bottom of Page 1 of the 1040 tax return) plus any amounts deducted or excluded for foreign earned income exclusion; foreign housing; domestic production activities; series EE bond interest used to pay for higher education; student loan interest or qualified tuition; employer-paid adoption expense; and traditional IRA contributions. Subtracted from that number is any income from the Roth conversion itself and for conversions, not contributions, subtract required minimum distributions (RMDs) from IRAs only.

Contributions to an employer-sponsored retirement plan (401 (k) plan, for instance), don't get added back in. That means, one possible way taxpayers can get below the $100,000 threshold this year or next is to contribute the maximum to 401(k) plans. The maximum for some taxpayers could be as much as $51,000 for 2008.

Besides maxing out one's retirement plan, business owners, the self-employed and other professionals might also consider deferring or accelerating income and expenses to reduce their MAGI in the year of the conversion.

2. Reduce MAGI for contributions

To be sure, not all taxpayers will be able to or willing to reduce their MAGI to $100,000 to do a Roth IRA conversion. But taxpayers do have another option, if they can bring their MAGI down to $116,000 or $169,000. At those income levels,  individuals can contribute to a Roth IRA, albeit at a phased-out amount.

It pays to open a Roth IRA even for a token amount because that will at least start the so-called five-year clock ticking. Under the Roth IRA distribution rules, account owners get to take a tax-free withdrawal from their Roth IRAs if they meet the five-year test and distributions are made on or after the account owner reaches 591/2.

3.Contribute to a nondeductible IRA

Taxpayers who can't get their MAGI down to $116,000 or $169,000 should consider contributing to a nondeductible IRA. Individuals can sock away $4,000 (or $5,000 if 50 or older) in their 2007 IRA and up to $6,000 in their 2008 IRA. That means a married couple, with one or two incomes, can sock away upwards of $46,000 from 2007 to 2010.

Nondeductible IRAS have their drawbacks. There are no upfront deductions, withdrawn earnings are taxable and there's some record-keeping required. (You only need to pay a tax on the withdrawn earnings not the already-taxed contribution so you have to keep track of contributions on Form 8606.)

All those contributions can be converted to Roth IRAs starting in 2010.

4.Open or contribute to a Roth 401(k)

Not all employers offer a Roth 401(k) plan, but such plans can be a big boon to high-income taxpayers. Consider: The most a married couple can put into a nondeductible traditional IRA in 2008 is $12,000. By contrast, one taxpayer alone could save $15,000 (or $20,500 if 50 and older) in a Roth 401(k) in 2008. The principals of small companies or professional practices should consider adding the Roth 401(k) option to their benefit package if at all possible.

Not all employer-sponsored plans allow in-service distributions, so savers might consider asking for an amendment to their plan.