unemployed and ROTH CONT VS CONV
If a client is 52 and was unemployed in all of 2010 and still is in 2011, can she add 6K of a savings acct for 2010 and 2011 and then also do a conversion on a dormant 401k plan?
I was told by Fidelity that the 6K contributions are only allowable if there was EARNED income of 6K for ea of those years. Are there any ROTH rules that have changed allowing some of these 8 mill who are unemployed an opportunity to contribute to a ROTH while not working or must a ROTH be funded w/ only earned income or via a conversion?
Permalink Submitted by Alan Spross on Mon, 2011-02-21 17:50
The rules remain the same with respect to the earned income requirement to make regular IRA contributions. In addition to w-2 income, self employment income, alimony, and non taxable combat and military differential pay qualify. Also, if the unemployed person is married, they can make a spousal contribution based on their spouse’s earned income.
But if the client can afford the tax bill, they can convert pre tax retirement accounts to a Roth IRA while unemployed since there is no earned income requirement for conversions. It is too late for a 2010 conversion unless by chance the client took an IRA distribution at the very end of 2010 because they have 60 days to roll it over or convert it. In the few cases where an unemployed person has the money to pay the taxes, converting while income is low can be done at a much lower cost since UC benefits are usually far less than earned income sources. But at 52 paying the taxes out of the TIRA distribution is costly because the 10% penalty on the non converted tax money offsets the otherwise lower tax bracket.