Conversion of “non-deductible” IRA to Roth IRA

Submitted by Steph Lo on Mon, 2019-02-25 18:49

Scenario:
W-2 wages (married joint >230K) exceed limits to contribute to employee IRA.
Proposal:
1. Open “non-deductible” IRA in a brokerage account ($6,500 catch up + $7,000 current year = $13,500) before April15.
2. Convert this IRA into a Roth IRA.
3. Utilize Roth IRA funds for investments. Not take out any money (except basis) until after age 59.5 years.

Question: any problem with this proposal?
Thanks.



Submitted by William Tuttle on Mon, 2019-02-25 18:54

All Roth conversions are pro-rata with all pre-tax balances in all traditonal, SEP and SIMPLE IRA accounts on 12/31 of the year of conversion. If there are no such other balances, make sure to rollover 100% of the account including any minimal earnings.

Submitted by Steph Lo on Thu, 2019-02-28 18:35

Objective: open a “non-deductible” IRA and then convert to Roth IRA.Questions:1.    What are limits that apply to the amount that can be placed into the “non-deductible” IRA?2.    What is the “type” of IRA account to be opened for it to be “non-deductible”?        All facilities only offer either “Traditional” IRA or Roth IRA.3.     If the account is opened as a”Traditional” IRA, what is the process to make it treated as         a “non-deductible” IRA?4.    What is the form used to convert the “non-deductible” IRA into a Roth IRA?5.    For 2019, the contribution limit is $7,000 if the participant is over 50 years old. Is that true?6.    For 2018, the contribution limit is $6,500 if the participant is over 50 years old. Is that true?7.    For 2018 contribution, if none was made, participant is allowed to “catch-up” and deposit $6,500 in 2019       before April 15, 2019. Is that true?8.   Can the contributions (2018 and 2019) be deposited in a single sum?9.   How long after the deposit before “converting” it?10.  If I want to add more money into the Roth IRA, can it be done directly into the account?        What limitations apply?Thanks.

Submitted by Alan - IRA critic on Thu, 2019-02-28 19:08

  1. Same as the amount you stated in your first post.
  2. Traditional IRA – you just don’t deduct the contribution
  3.  You must file Form 8606 to report the non deductible contribution with your tax return.
  4.  Same form – 8606
  5.  Correct
  6.  Correct
  7.  Correct. The IRA custodian must be told that the contribution is for 2018. You can also put this on your check.
  8. Yes, as long as the contribution states how to split the total to each year.
  9. No waiting requirement. Conversion can be done as soon as the contribution shows up in your account.
  10.  You can make conversions to a Roth IRA without limit. However, if you make your full traditional IRA regular contribution (6500 or 7000), you cannot also make a regular Roth contribution for the same year.  If your income allows you to make a regular Roth IRA contribution, that is preferable to making a non deductible TIRA contribution and converting. 

Submitted by David Mertz on Fri, 2019-03-01 15:52

There is no such thing as a “nondeductible IRA.”  For the purpose of determining the taxable amount of a regular traditional IRA distribution, all of the IRA owner’s traditional IRAs are treated as a single IRA.  Any basis in nondeductible traditional IRA contributions applies to all of the owner’s traditional IRAs in aggregate.

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