Roth 2010 Conversion
I have a 401(k) from my employer and do not have a non-traditional IRA. However, I would like to take advantage of opening a ROTH IRA in 2010. I am planning to open a non-traditional IRA in December 2009 with after-tax funding from my salary ($5,000) and then convert the entire amount to a Roth IRA in January 2010. As a long as my income remains above $100K, will I have to do this same exercise each year? If so, will I be able to convert the future non-traditional IRA after-tax funding account to the Roth IRA that I create in 2010 or will I have to open a new Roth IRA each year?
Permalink Submitted by Alan Spross on Sat, 2009-06-20 22:14
There are several issues here. If your income is not too high for a regular Roth contribution, just make that contribution. If it is too high, then you can make the non deductible TIRA contribution and convert it to a Roth IRA. Since you do not have an existing TIRA, these conversions will be entirely tax free or mostly tax free with only a small amount of earnings being taxable. The 100,000 income limit to convert ends after 2009, so you will be able to convert as of 1/1/2010.
As long as these conversions are mostly tax free and since the income limit will be gone next year, there is no reason to open new Roth accounts each year. Separate Roth accounts have been recommended in the past to simplify recharacterizations, but in your situation there will be no reason to recharacterize any of these conversions.
Note that there is no such thing as a non-traditional IRA. What you are referring to is a TIRA funded with a non deductible contribution. You would have to file Form 8606 for each year you make such a contribution. That avoids taxation a second time when you convert to the Roth IRA.
Permalink Submitted by Michelle Barnard on Sun, 2009-06-21 13:13
As long as my income remains above $150K, then I will not be able to make contributions directly to my Roth IRA throughout the year once the account is established in 2010. Please confirm that I will need to open up a TIRA funded with a non-deductible contribution each December and then roll it over to my existing Roth IRA account the following January.
Permalink Submitted by Alan Spross on Mon, 2009-06-22 01:44
Assuming that you will continue to have income too high for regular Roth contributions or a deductible TIRA contribution, I would proceed as follows:
1) Open your TIRA account with a 2009 non deductible contribution any time you wish between now and 4/15/2010. Then convert it immediately, but obviously not prior to 1/1/2010 since you are not eligible for a 2009 conversion. If you wait to contribute until 2010, then the conversion will be tax free, but if you open an account now and have some earnings before January, a small portion of your conversion will be taxable, but you will have more money to convert.
2) In 2010 and all years thereafter, make your contribution and instant conversion anytime you want, but if you do it early in the year, there will be more time for your Roth to grow potentially tax free. You will have two conversions in 2010, but that does not present any problem.
Since your TIRA will be drained, tell the custodian what you plan to do and ask them if it is better to hold the account number open or whether you will have to open a new one every year. It might be more efficient to leave $10 or so in the account if that is what it takes to keep it open. Take the fee structure into consideration in making this decision. As stated earlier, since these conversions will be tax free you will not be recharacterizing any of them, so you only need one Roth account to receive all the annual conversions.