Roth Contribution for Higher Incomes
Is their any problem with a person earning too much for a direct Roth contribution, to make a non-deductible IRA contribution and then immediately converts to a Roth? Thanks.
Is their any problem with a person earning too much for a direct Roth contribution, to make a non-deductible IRA contribution and then immediately converts to a Roth? Thanks.
Permalink Submitted by Alan Spross on Thu, 2011-02-10 20:08
The only issue here is that the conversion is only tax free if there is NO OTHER traditional, SEP or SIMPLE IRA balance. If there are any other non Roth IRA balances, the non deductible contribution amount must be pro rated with those pre tax balances and the conversion would be mostly taxable.
But if this is the only such IRA, this is an effective work around to the income limit for regular Roth contributions.
Permalink Submitted by Craig Adamson on Thu, 2011-02-10 20:31
Alan,
Do you know if a client does an non-deductible IRA and immediately converts to a Roth, are they barred from rolling monies out of old 401ks for that year?
Have a client with 2 old 401ks that we didn’t rollover in 2010 to allow her to contribute and then convert. But not sure where to look to see if we can do one more contribution/conversion before moving those assets over. We could show the timeline to the IRS that there was no other IRAs in place at the time. But the IRS may not care.
Thanks for your reply,
Craig
Permalink Submitted by Alan Spross on Thu, 2011-02-10 23:08
If a 401k rollover is done in 2011 before the end of the year, it will make the prior conversions mostly taxable. The ratio for the taxable % is determined by values on 12/31/2011 and the ratio at the actual time of the conversion does not matter. So if the goal is to make the contribution and conversion tax free, the rollovers will have to wait until next January, or if the client plans to follow this strategy for a number of years the rollover would have to wait indefinitely. The reporting of the non deductible contriburtions is done on Form 8606, the conversion is reported on the same 8606, and the calculation of the tax free portion is also done on this same form.
In fact, some taxpayers that have basis in their TIRAs are going the other way, ie they roll the pre tax IRA amounts into an employer plan so they can convert what is left tax free.
Note that if a client is starting from scratch, they could make their 2010 non deductible contribution now and convert it, and then make their 2011 non deductible contribution later on and convert that, and both conversions will be tax free, but the 401k rollover still has to wait until 2012 if those conversions are to be tax free.
Permalink Submitted by Craig Adamson on Fri, 2011-02-25 14:45
Alan,
thanks so much for your quick reply. Sorry I didn’t recognize you had posted it 2 weeks ago.
Your response confirms what I thought Ed Slott had said in a previous class or two as well as looking at my various reference guides. But i have been wrong before and appreciate you and other members weighing in with your knowledge.
We likely won’t wait to roll the monies over to an SDIRA as my client is 39 and has quite a few working years remaining. Her current 401k is limited in its investment choices (mostly Fidelity funds) and she expects to stay with that employer for several more years. She has the option of beginning to overfund a permanent life policy and treat that like a Roth IRA. So we do have other options.
Thanks again for your thorough, dilegent responses to questions from various posters. I find them to be very helpful and keep me from needing to ask the same question someone else has asked.
Craig