Roth conversion
I have a client that makes too much to contribute to a Roth IRA, so he is making non deductible contribution to traditional IRA and at the end of each year converting what has accumulated over to a Roth IRA. Can you explain the issues that occur if the client has other assets that were rolled over from 401k and such to traditional IRA?
thanks
Permalink Submitted by Alan - IRA critic on Fri, 2013-10-18 20:34
If there are no other non Roth IRA balances other than non deductible contributions the conversion will be tax free. But if there are pre tax IRAs such as a 401k rollover still existing at the end of the conversion year, the conversion will be mostly taxable under the pro rate calculation on Form 8606. The pre tax balance can be eliminated in many cases by rolling it into the current employer plan if the plan will accept the rollover. That frees up the client to make non deductible TIRA contributions every year and then convert them to a Roth. The conversion should closely follow the contribution to have the gains occur in the Roth IRA. The conversion should not wait until year end unless the contribution was also made at year end.