IRAs, 403b and earnings limitations 2009/2010
Mr Slott,
My husband opened a non deductible spousal IRA this year and contributed for 2009 & 2010. I plan to convert it to a Roth this month.
He contributes the max to his 403b plan..no match. Can he open a non deductible IRA for himself fund it for both years and convert also before year end?
Do earnings limits enter into these calculations?
We always understood we were not eligible for IRAs traditional or Roths because of earnings limitations but now have been assured this is not the case for 2009/10.
Thank you for your attention
MHK
Permalink Submitted by Alan Spross on Fri, 2010-09-03 17:23
I am not Ed, but will address your question.
Actually, it has never been the case that non deductible TIRA contributions could not be made. Anyone with earned income (plus qualified spousal contributions) has always been able to make a non deductible contribution to a traditional IRA, but the vast majority of people wanted the deduction to reduce their current tax bill. So this is not unique for 2010 at all.
I think you meant to say that YOU made an IRA contribution under the spousal rules using your husband’s earned income. When either of you convert to a Roth IRA now that there are no longer any income limits for conversions, the tax due will be based on the % of the balance that is pre tax. So if these IRAs are your ONLY traditional IRAs, there will be no pre tax amount in them unless they accumulate a small amount of earnings before you convert. Therefore your conversions will be totally or mostly tax free.
This procedure produces a “work around” that allows you to indirectly make Roth contributions using this two step process, even though your joint income may well be too high to make regular Roth contributions. Many people who did not have prior traditional IRA accounts are planning on following this strategy every year in order to build up their Roth IRA balances.
And if your husband wants to make additional Roth contributions, he should check to see if his 403b plan offers a designated Roth option. If it does, he could split his contribution between the pre tax and the Roth option in any proportion he wishes. The Roth portion would be after tax, so his current taxes would increase to the extent he makes designated Roth 403b contributions.