Non Deductible IRA contribution com-mingling
I have a client who made about $200,000 for the tax year 2008 and maxed out (with the catch up) his 401k. He currently left his employer but would like to take advantage of an investment benefit that will end at the end of the calender year 2008. He is not officially done with his current employer until 12/31/2008 and therefore unable to roll his current 401k money to an IRA until 1/1/09 at the earliest. He can still take advantage of the investment opportunity as long as he opens the IRA before 1/1/09. He has no current IRA’s to transfer.
The question is can he make a non-deductible IRA contribution for 2008 now to start the account and then at the beginning of 2009 roll his 401k money into that IRA? The understanding is the contribution is non-deductible and all of the distributions will be taxable upon withdrawal. Assuming that, can the contribution be made and the funds co-mingled?
Permalink Submitted by Alan Spross on Fri, 2008-12-05 22:43
Yes, anyone can make a non deductible traditional IRA contribution as long as they have taxable compensation.
In addition, the 401k can be rolled into that IRA next year. The only two possible downsides to that are:
1) Combining a rollover with a contributary account may result in a loss of the unlimited bankruptcy protection for the rollover. It might be subject to the 1,000,000 limit along combined with other such IRAs.
2) The IRA would not exclusively hold rollover money, therefore a future employer may be less likely to accept a rollover of that IRA into their plan.
He should file Form 8606 to report a non deductible contribution. This portion of his IRA will be tax free upon distribution.
The idea of an investment opportunity that hinges on the date an IRA is opened sounds somewhat suspicious. Perhaps this should be checked out for authenticity, with special attention to IRA prohibited transactions regarding certain investments.