Roth IRA
Funding a Roth when Annual Earnings Exceeds the Maximum Allowable to Fund a Roth in a Given Year:
Is it possible to fund a current Roth in the following manner:
1. Open a non-deductible IRA
2. Convert the non-deductible IRA to a Roth IRA
3. Assuming there are no other traditional IRA’s or IRA rollovers
Permalink Submitted by Alan - IRA critic on Mon, 2012-12-17 17:17
Yes, this strategy has received considerable press coverage and has become unofficially known as a “back door Roth” contribution through the two step process of non deductible TIRA contribution and conversion. Your point #3 is important because pro rate rules with all other non Roth IRA accounts would make the conversion taxable if there were other IRA pre tax amounts in TIRA, SEP or SIMPLE IRA accounts.
Permalink Submitted by Dan Lohmar on Mon, 2014-01-27 21:28
Just to clarify then: if a person has $95,000 in a traditional IRA with a cost basis of $0 and makes a $5,000 non-deductible contribution to a tradtional IRA, then converts only that $5,000 contribution to a Roth; that conversion will still be 95% taxed (pro rata portion)? You are saying there is no way to convert only the non-deductible portion, right?
Permalink Submitted by Alan - IRA critic on Mon, 2014-01-27 22:08
Correct. In this situation, any amount converted would be 95% taxable. The only way to make the conversion tax free is to eliminate that 95k in the TIRA by rolling it out of an IRA into a qualified plan such as the current workplace retirement plan of the owner or into a solo 401k if self employed. The remaining 5k of basis can then be converted tax free.