Slott Report Mailbag: Can I Open and Convert a Non-Deductible IRA to a Roth IRA?

Thursday, October 10, 2013

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag includes information on opening non-deductible IRAs for the purpose of a backdoor Roth IRA, 401(k) beneficiary issues and if RMDs (required minimum distributions) can be converted to a Roth IRA.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Can a person over 50 years old, who has made $215,000 year-to-date in 2013, has already put $23,000 into a 401(k) plan in 2013, open a non-deductible IRA in 2013 and convert it to a Roth IRA? If so, how much can be put into the IRA? The person may not have earned income in 2014.

Bill

Answer:
You are allowed to contribute $6,500 to an IRA if you have earned income this year and are age 50 or older. If you make a non-deductible IRA contribution, that amount can be converted to a Roth IRA tax-free as long as you have no other IRAs, including SIMPLE or SEP IRAs. All distributions and conversions from IRAs must use the pro-rata rule. The calculation is done on IRS Form 8606, which is filed with your tax return.

2.

If there is no beneficiary listed on a 401(k) who does the account default to when the person passes away?

Answer:
You have to check the 401(k) document to see who the default beneficiary is in this case. However, if the deceased 401(k) participant was married, federal law (ERISA) generally requires the surviving spouse to be the beneficiary.

3.

Hi Staff-

Can IRA RMDs (required minimum distributions) be converted into Roth IRAs? Also, can IRA distributions, in excess of RMDs, be converted into Roth IRAs?

Sincerely,

H Gomez

Answer:
IRA RMDs cannot be converted to a Roth IRA, even though the RMD is taxable. However, after having first received your IRA RMD, any amounts above that amount can be converted. The conversion will be taxable to you.
 

 
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