Client only has a Profit Sharing Plan where he cannot contribute and is married to a person who is participating in her 401kplan. If their income is over the $206,000 in 2020 then is the only option for my client a NON Deductible IRA contribution of $6,000?
Of which he can later turn into a ROTH IRA? Or, is client out of luck and cannot make an IRA contribution of any amount?
Please advise.
My client’s accountant/advisor has told him that if he does a non deductible IRA and converts to a ROTH IRA that he will need to pay taxes on the conversion. This doesn’t make sense . My understanding is that if he opens a NONDeductible IRA for $6,000 on a Monday and converts the IRA to a ROTH on a Tuesday and there is not growth then there is no tax for the conversion. Also, can he convert at anytime? I want my client to do this for 2020 tax year. Clients’ advisor is confusing me and putting doubt in my head.
You are correct, as long as there are no other non Roth IRA pre tax balances in other accounts such as a rollover IRA, SEP, or SIMPLE IRA. Client can convert anytime, although sooner is better before the contribution generates gains which would be taxed upon conversion. The advisor sounds confused and should be familiar with back door Roth IRAs by now. Another fallacy is that a TIRA contribution must be deducted or partially deducted if the person is eligible for the deduction. This is not true, a person can voluntarily claim a contribution as non deductible and report it as such on Form 8606. A non taxable conversion does not have to be held 5 years to avoid penalty, while a deducted contribution and taxable conversion does need to be held 5 years.
Permalink Submitted by Alan - IRA critic on Thu, 2021-03-04 20:51
Yes, due to spouse’s participation, his MAGI limit for the deduction is the same as for Roth contributions, so that leaves the ND TIRA contribution as the only option, executed as a back door Roth. This will work fine unless client has pre tax dollars in a non Roth IRA which would make the conversions mostly taxable. This problem could be solved if his PS plan would accept a rollover of any pre tax IRA balance, which would result in the back door conversions being tax free.