Client is 61 years old. He is contributing to a 2020 Traditional IRA that he opened this year. However, he does not qualify for a deduction because the Jt income is over $125,000 and he contributed to a 401k. Can he open a Roth and convert the nondeductible $7,000 2020 Traditional IRA to the Roth immediately? Is there a waiting period before he can convert it to a Roth and does he pay a penalty if he does convert immediately? Your response is appreciated.
There is no tax code or IRS required wait time for conversion. However, the IRA custodian might require a traditional IRA contribution settling period before the Roth conversion.
Make sure the client has no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. Otherwise, as Alan pointed out, any 2021 Roth conversion will be subject to pro rata taxation if there are any such balances on 12/31/21.
Thank-you. I knew there was some sort of stipulation when converting a Traditional IRA to Roth
If the client has pre-tax balances in any traditional, SEP and/or SIMPLE IRA accounts. They can rollover the pre-tax and only the pre-tax balances to their 401k plan. If that plan accepts such rollovers.
Then they are free to use the Backdoor Roth process with little to no pro rata taxation.
Permalink Submitted by Alan - IRA critic on Mon, 2021-05-17 23:25
There is no waiting period to convert, in fact the sooner the conversion is done the less likely there will be any taxable earnings in the TIRA. However, the conversion is only tax free if client has no other non Roth IRA balance at the end of 2021.