One time chance to put $20k into a Roth?

Usually I don’t like to use words like “tax loophole” or “tax shelter”, but their exists right now a situation where the sun, moon, and Internal Revenue Code have aligned perfectly to create an opportunity to create a permanent tax shelter by way of Roth IRA account(s). See if this applies to you:

Currently many people are precluded from contributing to a Roth IRA because of income limits or they are covered by another plan. Further, regular IRA conversions to a Roth IRA have also been restricted to people below certain income levels. The restrictions on conversions lapse on 12/31/2009. Anyone will be able to convert an existing IRA account to a Roth IRA account in 2010.

So here’s what you might do: Make a NONDEDUCTIBLE IRA contribution of $5,000 for 2009 to a traditional IRA (not a Roth) account before December 31. In January, convert the $5,000 traditional (nondeductible) IRA to a Roth, and make a nondeductible $5,000 Roth contribution for 2010 at the same time. Keeping score? You now have $10,000 in a Roth account. More good news: Your spouse can do the same thing. If you do, you could sock away $20k between the two of you in a matter of weeks and set it aside to grow completely tax free! If you are over 50, the annual limit is $6,000.

But there are caveats. The conversion will be a taxable event, so any gain on the traditional to Roth conversion will create a tax. In my hypothetical scenario a few days appreciation may not amount to anything. Also this assumes you do not already have existing IRA accounts. If you do, the first $5,000 contributions in my example will be aggregated with the value of all your IRA’s and you may not want to do the conversion piece of this plan. Also, the income limits for Roth contributions are still in place, so you may not be able to do the extra $5k in January depending on your income and marital status. As always, you MUST run your specific scenario past a tax professional who can run the numbers and determine if this works for you. The rules are complex. Don’t trust this one to the brother-in-law with turbotax!

Now, where can I find $20K?