non-deductible traditional spousal IRA
I went to my credit union and asked for instructions to open a non-deductible traditional spousal IRA for myself and immediately convert it to a Roth spousal IRA. The credit union told me I couldn’t do it and I would have to ask the IRS. I thought I could convert to Roth immediately so as to not create any income. What am I missing?
Permalink Submitted by Alan Spross on Wed, 2010-10-20 23:56
You are correct, the CU is just confused.
Why don’t you try again to see if the spousal aspect is the problem. The CU has no instructions in opening a spousal IRA because to them it is handled the same way as an IRA from your own earnings. In other words, it is just a rule to allow a contribution, not a type of IRA account that is titled as such. It is your own IRA and would be converted to your own Roth IRA.
I am assuming here that you qualify for the spousal IRA, and that you realize that the conversion will not be tax free if you have other TIRAs that were pre tax. In addition, I assume that you are not eligible for a regular Roth IRA contribution due to joint income being too high.
Permalink Submitted by John goetz on Thu, 2010-10-21 00:21
Thanks for your reply. By TIRA, I am assuming you mean that if I had contributed to a deductible TIRA in 2010, I couldn’t do a spousal one tax free. I do not work and have not contributed to any form of IRA in 2010. In past years I do have deductible TIRA and 403b which I am looking into converting to Roth IRA in 2010. Can I still go ahead as planned and open up a nondeductible spousal TIRA and then convert to a Roth? And yes it is because of we are over the income threshold.
Permalink Submitted by Alan Spross on Thu, 2010-10-21 00:56
I was referring to prior TIRA contributions from any year, and you posted that you do have these.
You can still make the non deductible contribution and convert right away, BUT since all your TIRAs must be considered in determining how much is taxable, your conversion will be mostly taxable. While you can convert the CU account that contains only this year’s contribution, for tax purposes you must calculate what % of all your TIRAs are from non deductible contributions. Therefore, you conversion will be mostly taxable. So if you wanted a fully tax free conversion, this will not work.
Example:
1) You make a 6,000 contribution (over 50) and this is your ONLY TIRA. You then can immediately convert it tax free to a Roth.
2) You make the same contribution as above, but you also have 54,000 in other TIRAs that were all from deducted contributions. You convert the new 6,000 IRA only, but for this conversion you must figure that since 90% of your total IRAs of 60,000 are pre tax, that 90% of your conversion will be taxable. Your taxable income for this conversion of 6,000 is therefore 5,400. You use up only 600 of your non deductible basis in this conversion, and that leaves the other 5,400 of basis from your non deductible contribution to be recovered in future TIRA conversions OR in distributions that you do not convert, such as RMDs.
Summary: Yes, you can make the non deductible spousal contribution and then convert that account. BUT….this conversion will be mostly taxable based on the above math. Form 8606 generates all these calculations and goes on your return.