Roth IRA Conversion
I have a client that makes above the AGI htreshold for Roth coontributions. The client has a large IRA rollover account presently. They asked me about setting up a new IRA account to be funded wiht a one-time non-deductible IRA for $5,000 and then converting that a day later. The thinking is their would be no taxable growth, and there is no income limit on the IRA conversion. 1) can this be done? 2) Do we have to tkae into account the other IRA rollover they have in this conversion or can we ignor that? It seems to me, if this works, it is a way around the income limitation on the Roth IRA.
Thanks
Matt
Permalink Submitted by Alan Spross on Mon, 2010-12-13 22:46
It would work, but only for those who have no other IRA accounts. The pro rate rules used on conversions would result in this client’s large IRA rollover causing his conversion to be almost all taxable. So in this case all this would do is increase his IRA balance.
This strategy works best for those who never contributed to a TIRA because their income was too high for a deduction and whose income was also too high to make regular Roth contributions. For them it is an effective work around that mimicks a regular Roth contribution.
Taxpayers in this situation who roll their pre tax IRA balance back to an employer plan leaving only their after tax basis in the IRA can then convert tax free, and can make that non deductible contribution before converting as well.