Roth IRA Conversion 2010 and 2011
Client is married filing jointly and earns $180,000, and is ineligible to contribute to a Roth IRA (“RIRA”) in 2010 and 2011. He and his spouse have no existing traditional IRA (“TIRA”) accounts but they each have RIRA accounts. (The couple exceeded the RIRA income limit for the first time in 2010, and previously contributed directly to RIRAs through 2009). Client would appreciate your input as to whether the strategy below will work and what risks you perceive in pursuing this approach.
On December 31, 2010, fund $5,000 in a new non-deductible TIRA in husband’s name. On January 1, 2011, fund an additional $5,000 in the same account. The husband’s TIRA would then have $10,000 on January 2 containing contributions for both 2010 and 2011. Then convert the TIRA on January 3 to the husband’s existing RIRA. Repeat the process for the wife’s RIRA conversion.
I understand from reading other posts on this forum that this approach may violate the “spirit of the law”, and that the IRS might consider such conversions as a contribution to a RIRA in substance. Should my client be concerned about these risks, and how can they be mitigated (e.g., converting the 2011 TIRA contributions in a later tax year)?
Permalink Submitted by Alan Spross on Sun, 2010-11-28 18:54
I have only seen that one post quoting the speculation that the IRS might consider the contribution as a Roth regular contribution and therefore excess. I think the chances of that are negligible, and even if the added transactions grated on IRA custodians and they pressed for relief, the solution would probably be to lift the income limits for regular Roth contributions. After all, every contribution to a Roth is after tax and producing more current tax revenue is critical. That’s why we have the 2010 conversion incentive, and the taxes generated can be used to “pay for” other Congressional spending.
So the client should proceed with the plan. In fact, there is no need to contribute this year. Both 2010 and 2011 contributions could be made at the same time (clearly flagging one for each year) and then converted immediately. Many similar clients are planning on executing this strategy annually.
There is no reason to try to mitigate any risks, as that would just be guesswork. Note that the downside in the event of such a ruling is minor. They would just have to treat the contribution as an excess contributions and remove it.
Permalink Submitted by Kevin Croy on Mon, 2010-11-29 02:05
Thank you very much for your prompt response, especially on a holiday weekend! We will proceed with this strategy.