Non-Deductible IRA to Roth IRA Conversion
I have a customer and his wife who made too much money last year to be able to contribute to a Roth IRA’s, so they are planning to make a non-deductible contributions to their traditional IRA’s @ $6,000 each, then plan to convert to their Roth IRA’s immediately. They also have Traditional IRA assets totaling over $300K. How will this Roth IRA conversion affect their taxes for 2011?
Permalink Submitted by Alan Spross on Wed, 2011-04-13 22:14
The pro rate rules require the balance of all TIRAs to be used in the calculation, that is all IRAs of each spouse separately.
If each spouse has only 6,000 of basis and one spouse has a pre tax balance of 94,000, then any conversion for that spouse is 94% taxable.
If the other spouse has an IRA of 206,000 in addition to the 6,000 contribution, then a conversion for this spouse is 97.2% taxable.
The strategy of making a non deductible contribution and then converting it does not work that well unless the balance in other TIRA accounts is small, due to the pro rate rules for conversion taxes.