Roth IRA Conversions 2010
With the Roth conversions allowed regardless of income in 2010, why couldn’t anyone going forward open a Traditional IRA, fund the maximum amount, and then flip it into a Roth in the same year? I am not sure if they closed this loophole by creating provisions for not allowing a conversion to be made in the same year of a contribution. Anyhow, it almost seems to good to be true… thoughts?
Permalink Submitted by Denise Appleby on Fri, 2009-06-19 14:35
Yes. That could be done.
If the individual has after-tax amounts in that or any other traditional/SEP IRA, the conversion would be prorated to include pre-tax and after-tax amounts
Permalink Submitted by Alan Spross on Fri, 2009-06-19 18:55
For people with no TIRA already in place because contributions could not be deducted, this approach will lead to instant conversion requests along with the non deductible TIRA contribution. The conversion would be tax free and become similar to a regular Roth contribution inasmuch as the 5 year holding requirement for conversions to avoid early withdrawal ONLY applies to the taxable portion of the conversion. Since these “instant conversions” would include no earnings, these Roth deposits could be distributed tax and penalty free.
Obviously this strategy loses some punch for those that already have rollover TIRAs from employer plans. Until the pre tax amounts of these TIRAs were either distributed/converted, the Roth conversions would be taxable on a pro rated basis. Some of these rollover TIRA owners may be interested in pursuing a rollover of the pre tax amounts into their current employer plan in order to make their current contribution/conversions fully after tax. The same 8606 form would be used to report the non deductible TIRA contribution AND the conversion.
All these changes lead to spiraling tax complexity and more complicated strategies. If simplification ever occurs, it might lead to ending the income limits for Roth contributions. Roth contributions defer the tax cost for several years, which seems to be a popular element with Congress and it’s usual 10 year budgeting projections.