IRA to Roth Conversion – Permanent?
I thought the IRA to Roth Conversion where the $100k income limit was waived was for the year 2010 only. I now have found out it is permanent. Please confirm.
Also, if someone is going to convert, they cannot pick and choose which IRA dollars/accounts are converting — like RMD the IRA considers ALL the IRA money to be part of one big pot and any convesion is from the “pool” vs (with gains and after tax combined) and the calcuation for taxation must account for both. So if you haven’t converted all IRA money to Roth, an IRA contribuiton after 2010 being changed to a Roth would be fully taxable vs treated as just an after tax contribution. Please confirm.
Permalink Submitted by Alan Spross on Sat, 2007-09-15 00:14
The income limit of 100,000 does permanently disappear after 2009. However, the rules for the year 2010 are unique in that 2010 is the only year where the taxes for conversions are deferred to 2011 and 2012. Starting in 2011 all conversions are taxed in the conversion year as they are now. In 2010 the default rule is deferred taxes to 2011 and 2012, but the taxpayer can opt out of that and have the 2010 conversion fully taxable in 2010. There are some situation where opting out may be advantageous.
You are correct in that Roth conversions pro rate non deductible basis per Form 8606, just as is done for RMDs or other TIRA distributions. But I am not sure I understand where you are going with your last statement. For example, if you have a TIRA of 100,000 with a 10,000 basis and you convert 50,000, Form 8606 will apply 5,000 of your basis to the conversion. 45,000 will be the taxable amount of the conversion. But that still leaves 5,000 of basis in your TIRA. You could still make non deductible contributions to a TIRA after 2009 if your income was too high for a regular Roth contribution. In the above example, if you made a 5,000 non deductible contribution to your TIRA after 2010, the remaining basis of 5,000 would be increased to 10,000. For distributions and conversions after that you would have 10,000 of basis to apply to the pro rate factor to determine taxable distributions. Therefore, the prior process of adding non deductible contributions to a TIRA after 2010 could very well continue as before. But there will be no restraints on conversions. Congress is looking forward to receipt of that conversion tax money, and that’s the reason for the special deferral incentive for 2010.
Permalink Submitted by Aaron Roush on Thu, 2007-09-27 13:34
If the conversion income limit is permanently waived, then couldn’t my higher income clients that are ineligble for Roth IRA’s effectively still do Roth IRA’s by making non-deductible contributions to a TIRA and then immediatly converting each year? Assuming all other money is in 401(k)’s, PSP’s and other non-aggregated accounts.
Permalink Submitted by Alan Spross on Fri, 2007-09-28 00:58
Yes, they could do that come 2010.
They would just have to fund the TIRA completely by year end because the conversion distribution must be done before 12/31. They would also have to attach both Parts I and II of Form 8606 each year, probably one for each spouse.