Likelihood of IRS Applying “Step Transaction” to Roth Conversion of Non-Deductible Contribution

Submitted by fairira on Fri, 2015-12-18 02:26

What do you think is the likelihood of the IRS applying the “Step Transaction” to the annual Roth conversion of a non-deductible contribution where the conversion takes place within just a day or two of the contribution?

Also, what is the minimum time to allow between the contribution and its conversion to be safe from any “Step Transaction” penalty?

Thank you.



Submitted by Alan - IRA critic on Fri, 2015-12-18 03:42

  • Wild estimates of course – step transaction applied to someone in the US causing speculation about a waiting period – maybe 1 in 200. Applied to you personally – infinitely small. The IRS does not know the date of your contribution or your conversion, only the year is reported to them. So an audit would have to be completed to determine the waiting period. As things stand if you wanted to reduce the existing miniscule odds even more, you would wait until the following calendar year to convert, but even that would not probably reduce the odds if you did this every year. In other words, don’t worry about it.
  • Future such conversions might be at greater risk because the administration has already proposed that all pre tax money should be converted before any after tax money. If passed into law, that would put an abrupt halt to the back door Roth strategy. So far, this proposal has not been included in any Congressional mark up, so it is not likely to pass. Even if it is passed at some point, it would have no affect on any conversions you have already processed prior to the law taking effect.

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