Traditional conversion to Roth
A client came to me wanting to open a Traditional IRA today, and then convert it to a Roth tomorrow. They want to do this because they earn too much to contribute to a Roth. Are there any pitfalls to this strategy? If they already hold an IRA rollover account, does that change the discussion? Can they classify the $5,500 they contribute today to the Traditional as the conversion basis, and ignore the rollover balance which has a basis of 0?
Permalink Submitted by Alan - IRA critic on Tue, 2014-01-28 23:51
They can make the non deductible contribution and convert it, but the presence of the rollover IRA will result in the Form 8606 pro rate rules making the conversion mostly taxable. The rollover balance must be included in the calculation. One potential solution here to avoid taxes on the conversion would be to roll the balance of his non Roth IRAs in excess of his basis to his current employer plan. Then he could convert the 5,500 or any other basis in his TIRA tax free.