Nondeductible IRA converts to Roth
Can a taxpayer make a contribution to a nondeductible IRA and then immediately convert it to a Roth IRA? Would there be a problem in light of the step transaction doctrine? I attended a seminar and the speaker mentioned that a case was reported where the IRS invalidated the transaction.
Permalink Submitted by Alan - IRA critic on Mon, 2013-07-29 22:10
I have not heard of such a case, and if correct it would produce a raft of attention and articles of explanation. According to the tax code there is no waiting period to complete any Roth conversion other than a reconversion of the same assets. Perhaps that is what the speaker was referring to. Note that a Roth conversion is subject to the pro rate rules, so all other non Roth IRA assets must be included in the pro rate calculation per Form 8606.
Permalink Submitted by Tricia Dizon on Tue, 2013-07-30 00:35
Thank you, Alan, for your reply. It is good to know that you have not heard of this. I just didn’t want my client to execute this contribute/convert strateg and only to have the 2 steps deemed collapsed into 1 – a direct contribution to a Roth, which would result in excess contribution penalty.The speaker was referring to a client story shared by one of the attendees at one of the seminars, and it was about the contribute/convert strategy.Thank again for your input.Tricia