Non-deductible TIRA, Roth conversion
My client came in last week and said her husband said for her to set up a traditional IRA for $5k because they couldn’t do Roths due to too much income. This initially puzzled me because the income limits are higher for Roths. But he’s thinking of having her do a non-deductible $5000 TIRA contribution. I’m thinking she could do that, although it’s his idea to then convert it to the Roth she has with us. As I understand it, a conversion would mean she would have to add up all her TIRAs (including her SIMPLE) and determine pre-tax vs after-tax amounts to figure out how much of this conversion would be taxable. Is that about right? Are there any major pitfalls of doing this and if not, how soon could she convert? She is
Permalink Submitted by Alan Spross on Mon, 2011-12-19 18:44
If their joint MAGI is too high for regular Roth contributions, then it is also too high for deductible IRA contributions IF either one is covered by a retirement plan at work.
A non deductible TIRA contribution does allow for contributions with no max income limit, however you are correct that the conversion is subject to the pro rate rules per Form 8606. That includes all her SIMPLE, SEP and TIRA balances. For example, if the balances for those other IRAs is 95,000 and she makes a 5,000 non deductible TIRA contribution, a conversion of 5,000 will be 95% taxable or 4,750 taxable.
She can convert anytime she wishes, but the tax bill should be considered. To get the pro rate benefit for a 2011 non deductible contribution if the conversion is also to be done in 2011, the contribution must be made by 12/31, even though she otherwise does not have to make the contribution until 4/17/2012.
Permalink Submitted by Michael Moffitt on Mon, 2011-12-19 19:04
As I suspected. Thanks!