Contribution to non deductible IRA, conversion to Roth
Client has no existing IRA’s and is ineligible to contribute directly to Roth IRA due to income restrictions. Can client make non deductible contribution to traditional IRA and immediately convert to Roth IRA? My understanding is that the law permits this, but another advisor has indicated that this is not a wise move as the IRS could view this as an attempt to circumvent the income restrictions on Roth contributions and a violation the “spirit” of the law.
Thanks for your help!
Chuck
Permalink Submitted by Alan Spross on Wed, 2010-11-24 20:42
Sure they could, but the IRS must operate on the rules in the tax code, not the spirit behind the rules.
Since Congress wanted to juice up tax revenue by taking the income limit off conversions, then they also have to allow the recovery of basis on Form 8606 as before, since they did not change the rules on application of basis for conversions, and they did not disallow non deductible contributions or put a waiting limit on conversions. Therefore, higher income taxpayers have a “work around” under which they are able to effectively replicate a regular Roth contribution, by doing a non deductible TIRA contribution and a conversion.
The tax collected for the above is no different than if the taxpayer made a deductible TIRA contribution and then did a taxable conversion. But if this work around is not palatable or is deemed inconsistent with the income limits on regular Roth contributions, more legislation is needed. I don’t think the IRS can act on this without Congressional legislation.