A regular IRA can be converted to a Roth IRA. In order to qualify for this conversion, your income that year can be no more than $100,000, on a joint or single return. Conversion triggers the deferred income tax but the income you pick up from the conversion won’t count toward the $100,000 limit.
Don’t confuse the $100,000 requirement from a Roth IRA conversion with the income limits for Roth IRA contributions. Such contributions are limited to $2,000 per year ($3,000 in 2002) and they have different income restrictions. Roth IRA conversions, on the other hand, can be of any amount. In addition, your income can go up in the following year, without affecting your Roth IRA. You won’t forfeit your Roth IRA, even if your income never again falls below $100,000.
Why should you convert to a Roth IRA and pay income tax upfront? Because eventually you can withdraw every cent from the account, tax-free. All you have to do is wait for five years, until you’re at least 59-1/2, before taking withdrawals.
