Roth Conversion Following a Previous Recharacterization
Hi,
I am 31 and have been fully funding Roth IRAs for my wife (28) and I for several years. This year, after contributing $4,500 to my Roth IRA, I realized we’d become ineligible to make Roth contributions as my income rose substantially. In December 2012, I opened a traditional IRA and recharacterized my $4,500 contribution plus attributable income (around $4,700 in total) to it and opened and fully funded a traditional IRA for my wife. I did this before I realized our contributions were non-deductible due to my employer retirement program and IRS income phaseouts.
I would like to know if it’s now possible for us to convert both traditional IRAs into our existing Roth IRAs or if my previous recharacterization would impede this is any way. If this is possible, and I assume it would have be done for tax year 2013, is there a benefit to doing it sooner rather than later as our traditional IRAs were just funded and have been sitting in cash.
Lastly, assuming the laws don’t change (which I realize is stupid assumption but for the sake of argument), is there any reason I couldn’t repeat this process every year and backdoor into the Roth?
I apologize if this has already been covered but I didn’t these questions specifically addressed anywhere.
Thanks,
Brad
Permalink Submitted by Alan - IRA critic on Sat, 2013-01-05 23:31
You can do exactly has indicated, ie convert the TIRA created by recharacterization of your Roth contribution. The conversion would be tax free providing you do not have any other balance in a TIRA, SEP IRA or SIMPLE IRA account. This applies separately to you and your spouse. Further, you can repeat this every year. There is no limit on the number of conversions you can do in a year, so you could convert your TIRAs now, then make your 2013 contributions and convert them before they generate earnings. When you convert, any earnings will be taxable. You would report your non deductible 2012 contributions on Form 8606 for each of you. In a year such as 2013 when you will have both non deductible contributions AND conversions you will also use a separate 8606 for each of you to report both the contributions and the conversions. Using this approach in future years means that you will not have to worry about income limitations or deduction phaseouts.