High income taxpayers have always had the front door slammed shut in their face when it came to exploiting the tax-free advantages of a Roth IRA. Now, with the recent signing of the Tax Increase Prevention and Reconciliation Act (TIPRA), high income earners can open the back door and begin benefiting from tax-free retirement assets.

The Tax Increase Prevention and Reconciliation Act (TIPRA) recently signed by President Bush eliminates the $100,000 Modified Adjusted Gross Income (MAGI) ceiling and the married taxpayer joint filing requirement for converting a traditional IRA into a Roth IRA, but not until the year 2010. All other rules continue to apply, which means that the amount converted to a Roth IRA will still be taxed as income at the individual’s highest tax rate. Under current law, single taxpayers with MAGI of more than $110,000 cannot contribute to a Roth IRA; or married taxpayers with joint income in excess of $160,000. However, by eliminating the income ceiling for conversions, the income limits on contributing to a Roth IRA have essentially been removed as well.

In 2006 and 2007, individuals can contribute up to $4,000 per year to a nondeductible traditional IRA ($5,000 if age 50 or older but under 70 1/2). In years 2008 – 2010, the amounts increase to $5,000 per year ($6,000 for investors age 50 or older but under 70 1/2). As a result, individuals under age 50 can contribute up to $23,000 during that five year stretch or up to $28,000 if 50 or older. If married, the same contribution limits apply to spouses who can also fund a separate nondeductible traditional IRA. (Reminder: IRS form 8606 must be filed each year a nondeductible traditional IRA contribution is made). Then in 2010, individuals can convert the nondeductible traditional IRA into a tax-free Roth account and have the choice of recognizing all of the conversion income in 2010 or averaging it over 2011 and 2012. At conversion, investors would only be taxed on the earnings that have accumulated in the nondeductible IRA. After 2010, individuals may continue to contribute to a nondeductible traditional IRA and immediately convert to a Roth IRA, thereby effectively wiping out the income limitations on contributions. Investors initiating conversions after 2010 will be responsible for recognizing the income during the year of conversion.

There is one catch: Individuals who already have a traditional IRA, including SEP and SIMPLE IRAs, cannot choose to only convert the nontaxable portion of the account. Even though investors are allowed to have multiple traditional IRAs; for tax purposes, all traditional IRAs must be lumped together and treated as a single account. Individuals need to add up the total value of all traditional IRAs and also the total amount of nondeductible contributions to those IRAs to determine what percentage of the conversion will be taxable.

TIPRA has created a wonderful planning opportunity as the Roth IRA has not been a useful savings vehicle for high income taxpayers. But with the passing of TIPRA, conversions to Roth IRAs will be available to everyone.