Slott Report Mailbag: Can I Convert My Non-Deductible IRA Contributions to a Roth IRA?

This week’s Slott Report Mailbag discusses Roth IRA contributions, conversions and the availability of certain employer-sponsored retirement plans.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

For the last 15 years, I have been putting money in my traditional IRA. I have also been maxing out on my pension at work. Since I never took a deduction for my IRAs, I would like to transfer my traditional IRA to a Roth IRA. What difficulties will I have with the IRS?

John Di Paolo

Answer:
You should have no problem converting your non-deductible IRA contributions to a Roth IRA as long as you have been filing IRS Form 8606 with your tax return in each year that you made a non-deductible contribution. The conversion of IRA funds to a Roth IRA is taxable. Because you have non-deductible contributions, those amounts aren’t taxed when they are converted but the earnings will be. There is a pro-rata rule that will apply at the time of your conversion. It can be found on Form 8606. All of your IRA accounts are looked at as one account and will be part of the pro-rata calculation. Your conversion to a Roth IRA will be partly taxable and partly after-tax based on the ratio of all of your after-tax amounts divided by the total balances in all your IRA accounts.

2.

Hello,

Can I contribute to my company 401(k), Health Savings Account (HSA), and a Roth IRA in the same tax year? If so, what are the income and contribution limits?

My wife and I are both in out middle 50s and have an AGI (adjusted gross income) of about $100,000 annually. For 2013: 8% of my paycheck is withheld for our company 401(k) (maximum % the company will match funds). I have $6,500 that will be funding a HSA and would also like to contribute to a Roth IRA (if tax code permits).

Michael in Mount Vernon

Answer:
There are no income limits to contribute to a 401(k), however, the income limits for contributing to a Roth IRA for 2013 are $178,000 – $188,000 if you file jointly. The tax code allows you to contribute to all three if you meet the requirements for all of them.

3.

If a company already has a SEP IRA, can they contribute to an IRA for certain employees as well?

Best regards,

Stacey

Answer:
Yes. An employer-sponsored IRA arrangement allows an employer to contribute to IRAs of any employees he or she chooses. The IRA contribution is treated as wages to the employees.
 

-By Joe Cicchinelli and Jared Trexler