2010 Roth IRA
I have been contributing to Roth IRAs for me and my wife for the last few years on the first week of the year itself. Now, in 2010, there is a chance that our income will exceed that of the Roth IRA limit – this mostly is dependent upon the capital gains from stock sales during the year which I won’t know until at the end of the year. We are not eligible for Traditional IRA because we both contribute to 401k at work; so, we don’t have any Traditional IRA as well. I heard that, in 2010, there may be a way for everyone, regardless of their income, can contribute to a Roth IRA by a work around. Could somebody let me know if (and so how) I can do this at the start of the year itself for 2010 contribution? Or, am I better of waiting till 2011 to make a contribution for 2010. Just after reading some other posts, it looks like I can open a Traditional IRA with $5000 contribution for 2010 on say 4th of Jan 2010 and ask the custodian to re-characterize it to Roth IRA and report IRS the original contribution as Traditional non-deductible IRA. Is this right? Thanks so much in advance.
Permalink Submitted by Alan Spross on Fri, 2010-01-01 02:29
Basically, what you heard is correct. Everyone with earned income has been able to contribute to a traditional IRA (TIRA) all along, but many could not deduct it if their income exceeded limits and they were covered by a retirement plan at work.
Since you have no TIRA assets at present, you are a perfect candidate for this “work around”. You could make both a 2009 and 2010 TIRA non deductible contribution next week or later and then immediately convert it to a Roth IRA tax free. To do this, you would file an 8606 with your 2009 return showing the non deductible contribution. Then, with your 2010 return you would also attach an 8606 to do two things. FIrst you would report the 2010 contribution that would bring your basis up to 10,000 in total, and also the conversion to a Roth IRA. If you convert instantly, there is no chance for any earnings to generate in the TIRA prior to conversion, so your conversion would be tax free. And since your conversion would be tax free, you would then opt out of the two year deferral of the taxable income simply because there is no taxable income to defer to 2011 and 2012.
You could then repeat this cycle each year, although in 2011 you could only do one contribution of 5,000 before converting. The net effect of this is the same as being able to make regular Roth contributions which you cannot do since your income is too high. Regular Roth contributions will continue to have maximum income limits, but starting in 2010 there is no income limit to do conversions. That is why this work around is effective, although the tax free conversions are only possible for those who do not have pre tax amounts in their TIRA to be pro rated with the new contributions.
Note: The term to use to request the change to a Roth IRA is “conversion”. It is only a recharacterization if you undo the conversion later, but in your situation there is no reason to recharacterize the conversion.
Permalink Submitted by Senthil Kumar on Fri, 2010-01-01 02:45
Alan: Thanks so much for your detailed and clear answer to my question (as well as to many other questions on this discussion board). I just wanted to clarify one thing: since I have already contributed $5000 to 2009 Roth IRA at the start of this year, I can’t make a TIRA non-deductible contribution for year 2009 – right? Wish you a very happy new year 2010!!
Permalink Submitted by Alan Spross on Fri, 2010-01-01 03:10
You are correct. If you already made the 2009 contribution you cannot make another one and will be limited to the 2010 contribution. Meanwhile, if the 2009 contribution was made previously, it may well have generated earnings which will be taxable upon conversion. Form 8606 calculates the taxable portion of your conversion.
Happy New Year!