Roth IRA Conversions
2-part question re: taxpayer with no IRAs currently other than 3 accounts he inherited from his father from which he is taking RMDs:
1. Is there any reason taxpayer can’t contribute the maximum amount ($12K) for 2011 and 2012 to a traditional IRA prior to 4/17/12, then immediately convert the total to a Roth, resulting in no tax on the conversion?
2. Since the inherited accounts can’t be converted, they don’t figure into the tax calculation on conversion, right?
Thanks.
Sherry
Permalink Submitted by Alan Spross on Wed, 2012-03-28 00:18
1) Taxpayer could do that if they have the earned income. If the contributions are not deducted the conversion will be tax free. If the contributions can and are deducted, then the conversion will be taxable. Deducting the 2011 contribution if possible, will reduce taxable income in 2011 and increase it by the same amount with a 2012 conversion.
2) Correct. Any basis in the owned IRA contributions documented on Form 8606 is totally separate from the inherited IRAs. While the inherited IRAs might have their own inherited basis, it would have to be reflected on a separate 8606 from the 8606 used to report owned IRA non deductible contributions and conversions.
NOTE: Taxpayer could combine the 3 inherited accounts into one if they wish since they were inherited from the same decedent. However, they should not be combined if for some reason the RMD divisors are different. One way for that to happen would be if taxpayer was sole beneficiary on one IRA, but on another was the younger beneficiary of two or more and separate accounts were not created by the deadline.