Roth IRA contributation limitation work around.
Situation: Client age 40 and spouse age 37 make $500,000 and $100,000, respectively and fully max out their 401k’s each year. Can they open a non-deductible IRA at $5,000 each and then convert to a Roth Conversion IRA each year as a work around to the Roth IRA income limitations? If so, are there any tax and penalty implications?
Permalink Submitted by Alan Spross on Tue, 2009-11-10 00:19
There are no impediments to executing that strategy. For example, if couple has no current TIRA accounts, they could make both their 2009 and 2010 contributions early next year and then immediately convert to a Roth IRA. The conversion would be tax free since it would include only non deductible contributions. In fact, the taxpayer could remove the conversions without penalty because the 5 year holding period only applies to the pre tax portion of a conversion.
Form 8606 would be used to both report the non deductible TIRA contributions and the conversions.