Today if you earn more than $100k/year you would not be eligible to convert a traditional IRA to a Roth IRA. However, a tiny window of opportunity presents itself beginning in 2010 for those people earning 100k plus.  This loophole is called the “Prevention and Reconciliation Act of 2005.” As of two years ago, you can wait until 2010 to do the conversion when the $100,000 income restriction no longer applies. If you decide to make the conversion in 2010, you may push half the taxable converted amount taxed in 2011 and half in 2012.

Although this opportunity may excite some of you, you must remember 2010 is still quite a ways away and Congress can still close this loophole before 2010. However, Congress rarely moves fast and until this time comes this may be an excellent way to circumvent your IRA contribution limits.

If you contribute to a retirement plan sponsored by your employer (401k, etc) then you should know that any contributions to a Traditional IRA are likely not tax deductible due to income restrictions. However, with this loophole, you can then convert those over to a Roth IRA free of charge because you’ve already paid the tax on them (only paying taxes on any gains you have made). For example, if you put $5,000 into a Traditional IRA and could deduct nothing. If by 2010, you see that your IRA is now worth $6,000, you could convert and only pay taxes on the $1,000 of gains, not the full $6,000.

As always, you should consult with certified tax professionals before converting any funds.