Can a client make a deductible traditional IRA contribution and then do a roth conversion in the same year?
The client is self-employed so he does not have a company retirement plan and his income is too high to make a Roth contribution directly. He does have multiple IRAs which complicates the backdoor Roth strategy a little bit. My question is could he make a deductible contribution to his Traditional IRA and then do a Roth conversion? I assume he could do this and would the two just offset each other and have no tax due?
Permalink Submitted by Glen Starr on Wed, 2024-03-20 02:56
Backdoor Roths can involve deductible contributions made to a Traditional IRA as you describe for those who exceed the income limit to contribute directly to a Roth IRA, but who are not an active participant in an employer retirement plan.
The net result is an offset: the taxpayer gets a pre-tax deduction on their contribution, and then the conversion is counted as taxable income, the income is offset by the deduction … ignoring any step-transaction problems, which is a whole ‘nother subject!
You mention multiple IRAs, but not whether any of the IRAs have after tax contributions.
If any of the IRAs do have after-tax money – and a custodian doesn’t track that info – the fun begins tracking it all with the pro-rata and aggregation rules via Form 8606 to keep after-tax vs pre-tax money properly accounted in the IRA.