Some tips for playing catch-up with a Roth individual retirement account
Q. I started making maximum Roth IRA contributions at 61, including catch-up contributions, and plan to do so every year I continue working, but want to verify that I am eligible.
I also have a question about converting my traditional IRA into a Roth IRA. I have my traditional IRA in a certificate of deposit I’d like to convert to a Roth at maturity. Will the conversion amount count toward my contribution the year the CD matures? Also, I’m not sure how the “catch-up’’ contribution works. If I convert, will my catch-up years become all caught up? The catch-up means a lot to me.
A. Not to worry. A Roth IRA is a type of individual retirement account that does not offer a tax deduction up front but allows tax-free withdrawals if certain conditions are met (most common, that you have a Roth IRA for at least five years and you are at least 59 1/2 years old). With a traditional IRA, you may be able to claim a tax deduction on your contributions but are taxed on withdrawals.
Regular contribution limits for 2009 are $5,000 for traditional and Roth IRAs combined. Any year you are eligible to contribute to both types, you may pick either one or split your contribution between the two. On top of this $5,000, people who are at least 50 as of Dec. 31 are allowed to make a catch-up contribution of $1,000 for that year, for a total of $6,000 in 2009. You can make this catch-up contribution every year you are eligible, not just once.
After age 70 1/2, you can no longer contribute to a traditional IRA. But you can keep contributing to a Roth IRA whatever your age, provided your contribution does not exceed your earned income - which refers mostly to income from work - and that your income is within annual limits, based on tax-filing status.
If you qualify by income (most people do), you can make the full contribution to a Roth IRA every year, including any catch-up amount, regardless of how much, if anything, you also convert. Check with your IRA custodian on this: It may be possible to convert your CD without penalty before it matures.
If you convert, you have to pay taxes on the converted amount but with no 10 percent penalty, even for people under 59 1/2. To convert this year, your modified adjusted gross income, not counting the converted amount, cannot exceed $100,000. For 2010 and later, anybody can convert, regardless of income.
Q. I considered converting my traditional IRA to a Roth, but I believe the income tax in the year of conversion has to be paid with funds other than those in the IRA. Is this true?
A. There’s no law that says you must pay the taxes with funds outside the converted IRA. Unless you can afford to do so, however, it may not make sense to convert. The main reason to convert is to allow the money to continue to grow and escape taxes on withdrawal, and to eliminate mandatory withdrawals after age 70 1/2.
Humberto Cruz can be reached at AskHumberto@aol.com. 
