Workaround contributing to a Roth IRA
Can someone please let me know if this strategy works?
John is 35 years old. He is single and his AGI is $350,000. He has maxed out his contribution to his 401(k) of $17,000. He would like to have more money grow taxed deferred. John is not interested in any type of annuities of life insurance.
He sets up a traditional IRA at Fidelity for $5,000. He doesn’t get a deduction for his $5,000 contribution. John has the money invested in a money market account and there have been no gains in the contract. 2 weeks later John requests to have his traditional IRA converted to a Roth. John doesn’t pay any taxes on the conversion since his original contribution was with after tax money. Will John be able to do this strategy?
Permalink Submitted by Alan Spross on Thu, 2012-11-15 01:56
Yes, it is popularly referred to as a “back door Roth” contribution.
However, the conversion is ONLY tax free if John as NO other TIRA, SEP IRA, or SIMPLE IRA balances.
If he has additional pre tax non Roth IRA balances, his 5,000 of basis from the non deductible contribution must be pro rated over those other pre tax balances as if he had one large IRA. In other words, if he also had a 95k rollover IRA and converted 5k, his conversion would be 95% taxable (95/100). Both the non deductible contribution and the conversion are reported on Form 8606, which also calculates the pro rate math.
Permalink Submitted by Casey Herron on Thu, 2012-11-15 02:02
That’s great news; I appreciate your knowledge and insight on the subject matter.