IRA to Roth in 2010 Opportunity or Disaster?
High income earners not eligle for Roth put contributions into non deductible IRA’s in 2007,08 and 09.( $5000,$6000& 6000.)They also have a Rollover account worth $200,000. In 2010 can they convert the non-deductible account and only transfer the non deuctible contributions into it?How does the rollover$200,000 play into this scenerio? Should a seperate IRA be set up now to make the accounting easier when you convert in 2010. Any help with this is appreciated. This could be an oppurtunity or a disaster if you have to account for all IRA’s when you convert. Thanks.
Permalink Submitted by Al Fry on Mon, 2008-04-07 18:14
No. Ithe IRS says a person only has one IRA. If $15,000 of non deductible IRA was converted to a Roth, and the person had $135,000 in a non-taxed Rollover IRA, then $1500 would be non-taxed, while $13,500 would be taxed.
Permalink Submitted by Alan Spross on Tue, 2008-04-08 00:53
Al is correct.
However, if the rollover account can be transferred into the current employer plan, then the pro rating upon conversion will be much more favorable, involving only earnings on the non deductible contributions.
Even if this cannot be done, I would not characterize the situation as a disaster. They would just pay tax on most of the conversion, but still have the opportunity to move funds into a Roth that they may not have had prior to 2010.
Permalink Submitted by Kevin Clark on Tue, 2008-04-08 19:27
I agree that it will be a disaster to convert to a Roth in 2010 and have to include ALL IRAs for the calculation. Even a non-deductible IRA that was segregated from other IRAs will be subject to taxes under the current rules. Does anyone know if there is a way to “petition” the IRS to look at the current rules?
Otherwise, I think it would be foolish to set up non-deductible IRAs for high income earners (over $100k) since they will be taxed twice on the money they convert in 2010. Also, has anyone looked at the IRS Form 8606 that needs to be filed each year? It’s brutal and discouraging.
Permalink Submitted by Alan Spross on Tue, 2008-04-08 19:41
I don’t think there is much chance of changing the 8606 methodology since it has always applied to conversions as well as ordinary distributions from a TIRA where the taxpayer has any basis from either non deductible contributions or rollovers of employer after tax money.
But there is no double taxation. Pro rating the taxable amount will over time get the after tax amounts into the Roth, it just cannot be done by moving the basis first and pre tax amounts last.
I do agree though that much of the financial press that has been touting the strategy of making non deductible TIRA contributions and converting in 2010 has failed to point out the pro rating procedure over all IRAs. The assumption has been that high earners have not been contributing to a TIRA because they cannot deduct it and even more unlikely, that they have not rolled over employer plans to a TIRA. These rollovers are generally the cause of having a high taxable percentage on future conversions.
One potential solution to this is to delay employer plan rollovers until after the conversion year, and/or attempting to roll prior rollovers into the current employer plan. These rollovers back into an employer plan are not allowed to include after tax amounts, so this could result in the remaining TIRA assets being mostly from non deductible contributions in the year of conversion.