Simple IRA and IRA to Roth Conversions
Have a client who has been making non-deductible IRA contributions that we have been converting to her Roth IRA every year because she has no other IRAs. She exceeds the income threshold to contribute directly to the Roth. Her employer has opened up a Simple IRA that will go into effect 12/01/15 for the 2015 tax year. She would like to max this out before year end at $12,500. Can I convert her IRA balance to her Roth IRA BEFORE she makes contributions to her Simple and avoid causing basis in her Simple IRA for the conversion? Or since both of these would be for the 2015 tax year, there is no way to convert her IRA to her Roth without causing basis? Thank you in advance for your help.
Permalink Submitted by Alan - IRA critic on Thu, 2015-11-05 01:09
Any SIMPLE IRA balance on 12/31/2015 will cause the Roth conversion to be subject to the pro rate rules for determining the taxable amount regardless of when in 2015 the conversion is processed. She may not be able to max out the SIMPLE IRA since salary paid before the SIMPLE IRA is adopted cannot be contributed, so her contributions will be limited to the December salary amount less deductions such as FICA or other deductions such as insurance and taxes.. The lower the December SIMPLE IRA contributions, the lower the taxable portion of the Roth conversion will be.
Permalink Submitted by Todd Martin on Thu, 2015-11-05 01:49
That is what I was afraid of. Thank you as always for your help Alan.
Permalink Submitted by William Tuttle on Sat, 2015-11-07 03:00
Also, keep in mind that there is a restriction during a two year period from the date of first contribution to a SIMPLE IRA. During this period you can only rollover from one SIMPLE IRA to another SIMPLE IRA. A rollover to any other retirement plan will result in a 25% penalty. Unfortunately, contributing to the SIMPLE IRA (which the client should most certainly do), will effectively eliminate backdoor Roth contributions.