converting to Roth for 2010 and 2011
My wife and I make to much to open a ROTH IRA. I have been told I can open anafter tax IRA and convert to a Roth IRA for 2010 and 2011 for both myself and wife. if the accounts have just been open they will have almost no gain. Will I owe taxes? Is this a loophole? I believe a 8606 form needs to be filled out we have other IRA’s will this be a problem?
Permalink Submitted by Alan Spross on Fri, 2011-03-11 19:47
As long as you have earned income to cover both contributions, a non deductible IRA contribution can be made and then a conversion can follow. And you will need an 8606 to report the non deductible IRA contributions. But since you have other TIRA accounts, your conversion will not be tax free because Form 8606 calculations require your basis from non deductible contributions to apply over the total of all your TIRA accounts. This is the pro rata rule also known as the “Cream in the coffee rule”.
For example, if you non deductible contribution is 6k and you have other basis from prior years of 9k, and a total IRA balance of 100k, then 15% is your basis and your conversion will be 15% tax free. Conversely, if the new contribution was your only IRA balance you could convert tax free. This is indeed a way to get regular contributions into a Roth IRA even though your income is too high for Roth contributions. This is fully legal, but the IRS might conceivably act on this at any time because it is a way around the regular Roth contribution income limits.