TIRA by accident
November 2011, I realized that I had accidentally opened a Traditional IRA instead of a Roth IRA. My AGI is just above the phase out for a TIRA.
In 2010, I contributed $5,000 to my TIRA but took no deduction.
In 2011, I contributed $1,200 to my TIRA
In 2011, I opened a Roth and have contributed $3,800.
Can I just file a form 8606 for my 2010 and 2011 TIRA contributions then at a later date convert them to a Roth? Any suggestions on the easiest way out of this mess?
thanks
Permalink Submitted by Alan Spross on Fri, 2012-02-03 02:26
If your income is just above the limit to deduct a TIRA contribution, then it is low enough to qualify for a Roth contribution.
For 2010, it is too late to change your contribution, but you can file a stand alone 2010 Form 8606 to report a 5k non deductible contribution.
For 2011, there is still time to recharacterize your 1200 TIRA contribution as a Roth contribution and together with your 3800 Roth contribution, you will be at the max allowed if under age 50. This is one option.
You will need to include an explanatory statement with your 2011 tax return explaining that you made a TIRA contribution and recharacterized it as a Roth contribution. Doing that, you will not need an 8606 for 2011.
For another option, if you have no other TIRA balance except for these 6,200 of contributions, you could leave the 1200 as is and convert the entire balance to a Roth IRA. For that you would need an 8606 to report the 2011 contribution (added to your 2010 amount) as non deductible. You can then convert this in 2012 tax free except to the extent it has earnings in excess of the amount you contributed.
The best option depends on whether you have other TIRA, SEP IRA or SIMPLE IRA balances or not. If not, and if you do not have much in earnings that would be taxable, you can avoid recharacterizing and just convert the total.
Permalink Submitted by C Smith on Fri, 2012-02-03 04:21
Thank you for the reply. My AGI is right at $66K. I am single parent and have a 401K, so that puts me right at the end of the phaseout.
I have no other IRA’s.
One other option I have thought about. I also have an HSA that I can contribute up to $5,000 more to. (family max $6250 – $1250 I have already contributed = $5,000 I can still contribute). Is it correct to say if I contribute to my HSA, that will lower my AGI for IRA purposes?
So would it be true that I could put an extra $2,400 into my HSA, lowering my HSA to $66,000 – $2,400 = $63,600. Then I could deduct the full $1,200
Does that sound correct? Then I just file a form 8606 for 2010?
thanks
Permalink Submitted by Alan Spross on Fri, 2012-02-03 18:20
Yes, you could make the HSA contribution and that would qualify to to deduct the 1200 TIRA contribution as well.
You have a number of choices depending on whether your want to increase your Roth or reduce your taxes. If you want to reduce your taxable income for 2011, you can keep the TIRA contribution and make an HSA contribution just large enough to qualify you for a partial deduction of 1200 which would cover your TIRA contribution as you calculated.
But with your TIRA mostly composed of basis from the 2010 non deductible contribution, it would be a good time to convert it before it grows. Now you are faced with another decision, which is determining in which year you want to have more taxable income, 2011 or 2012.
1) If you do the HSA contribution, and deduct the TIRA contribution of 1200, these deductions will reduce your 2011 tax. But if you convert the TIRA in 2012, you will then pay taxes to the extent the balance is greater than 5,000. That would include gains on your contributions plus the 1200.
2) If you file an 8606 claiming the 1200 as non deductible and then convert the entire TIRA to your Roth, the only taxes due would be on the amount of balance in excess of 6200. You could then look at the HSA contribution as an unrelated option that will reduce your taxes for 2011, but not affect the IRA situation.
Both plans avoid recharacterizing the 1200 contribution, but converting the entire TIRA balance is a good idea because you have a high % of basis in your TIRA because of the 2010 non deductible contribution. But starting in 2012, you have plenty of room for income growth for making regular Roth contributions because the phaseout starts at 110k.
The broader question here is whether you should really be directing contributions to your Roth or favoring deductible contributions, and that relates further to whether you have a plan at work or not. I assume that you did not deduct 2010 because MAGI being too high rather than by choice or just forgetting to deduct it.
Permalink Submitted by C Smith on Sat, 2012-02-04 00:22
[i]I assume that you did not deduct 2010 because MAGI being too high rather than by choice or just forgetting to deduct it.[/i]
I had honestly thought I had opened a Roth IRA. After a year and a half of auto withdraws, I looked at the account and thought “oh crap what did I do”.
My TIRA has lost money (invested in a European fund), so I don’t think I will have any profit before year end. I think I will go with claiming both 2010 and 2011 as non-deductable, then convert it to a Roth for 2012.
Thank you again for the advice.
Permalink Submitted by Alan Spross on Sat, 2012-02-04 00:55
Well, if you happen to be able to deduct the 2010 return, you could also amend your 2010 return to take that deduction. If you cannot deduct it, then you must file the 8606 to get the credit for a non deductible contribution. While it is too late to change that contribution to a Roth contribution, it is not too late to amend your tax return to claim the deduction if your modified AGI in 2010 was not too high to qualify.