Roth Conversion from non deductible TIRA in same year
I have a client that has made a Roth contribution this year, but will end up making too much money to contribute to a Roth. He will be backing out the contribution and making it a non-deductible TIRA. Can he immediately convert it back to a Roth in the same tax year?
Permalink Submitted by Alan Spross on Mon, 2011-06-06 17:35
Not sure what you meant by “backing out” the contribution, but the usual way to correct the contribution is by recharacterizing it along with any earnings as a traditional IRA contribution. An alternative is to ask for a return of the contribution and then the client could re contribute in the original amount to a traditional IRA. The factor to best determine which method to use is whether the earnings are positive or negative. If negative, the return of contribution works best, and if positive recharacterization works best because the earnings stay in the IRA and are not taxed or penalized.
For the non deductible TIRA, Form 8606 must be filed to report the non deductible contribution. Once the contribution is in the TIRA, it can be converted at any time. If this is the only TIRA, SEP or SIMPLE IRA balance, the conversion will be tax free except for earnings, but if there are other IRA balances, then most of the conversion will be taxable due to the pro rating requirements as calculated on Form 8606.
Permalink Submitted by Lee Applebaum on Mon, 2011-06-06 18:11
So I can file the 8606 with the 2011 return for the non-deductible TIRA and also convert $5,000 to a Roth in 2011?
Permalink Submitted by Alan Spross on Mon, 2011-06-06 18:37
Yes.
But if the Roth contribution had 300 of earnings and therefore 5,300 went back to the TIRA, if this is the only TIRA, client would probably just convert the entire 5,300 and pay taxes on the 300 of earnings.
If the TIRA was 5,300 and client only converted 5,000, the pro rate rules would result in 5.7% of the conversion being taxable. 5,000 X 5.7% = $285 taxable. Since there is only $15 difference in the taxable amount, client would probably convert the entire TIRA value of 5,300.
Again, this all assumes that this is the only TIRA client has.
Permalink Submitted by Lee Applebaum on Mon, 2011-06-06 18:42
Thanks. One more question. Is there an income limit in 2011 to convert? I know it was waived in 2010.
Permalink Submitted by Alan Spross on Mon, 2011-06-06 19:03
No income limit for any year after 2009. For Roth IRAs, the income limit only applies to regular Roth contributions, not conversions.