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My income is above the Roth IRA Cap (which I believe is 125k). I just found out that there is a loophole where you can contribute to a non-deductable IRA, and then convert that to a Roth IRA (even if you're above the normal Roth Cap).

For 2012, I understand that I can still contribute to an IRA until April 2013. However, is it true that the deadline to convert 2012 contributions to Roth IRA is 12/31/12? If so, I cannot do the workaround for Roth Contributions for 2012, correct?

If I can, is there any problem with lumping this all together for 2012 and 2013? That is, immediately opening an account with Wells Fargo and adding 10.5k to a non-deductable traditional IRA, and converting it all to a Roth IRA.

Thanks in advance!

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Do you maximize your 401k contributions to the limit?

Jahlapenoez (Mar. 29, 2013 @ 9:05a) |

Max out 401k every year.

jasmithvr6 (Mar. 29, 2013 @ 10:00a) |

Hello

I want to convert my Traditional IRA to Roth IRA.

I believe you have to convert all your traditional IRAs to Roth IR... (more)

kdoshi1 (Jun. 21, 2013 @ 7:21p) |

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You have to pay taxes on the amount transferred during the tax year that you initiate the transfer. There are no limits on how much you can transfer at a single time, but you will need to pay taxes (as income) on the entire amount that you transferred during that tax year. If you are expecting a dip in income (and thus a reduction in tax rates) in one particular year, then it would be a good time to transfer the entirety of the IRA into a ROTH.

ETA: I'm wrong. Didn't see that he is contributing to a non-deductible IRA, see soupcxan's comment below.

ironfist99 said:   You have to pay taxes on the amount transferred during the tax year that you initiate the transfer. There are no limits on how much you can transfer at a single time, but you will need to pay taxes (as income) on the entire amount that you transferred during that tax year. If you are expecting a dip in income (and thus a reduction in tax rates) in one particular year, then it would be a good time to transfer the entirety of the IRA into a ROTH.

Wrong. There is no tax due on the transfer if you contribute to a non-deductible IRA and then convert it to a Roth. The money is already post-tax, there is no more tax to pay. Tax would only be due if you have other pre-tax IRAs out there that you must prorate with your non-deductible conversion (beware of this if you have a rollover IRA from a previous employer's 401k).

To answer your question - yes I believe the conversion deadline was the end of the year (2012)

Thanks for the quick reply ironfist.

All the funds I would be putting into a non-deductable traditional IRA (10.5k for 2012 and 2013) would have been taxed already. Wouldn't there be no need to pay taxes (as income) on the amount transferred/converted to a Roth IRA?

In other words, can I contribute 10.5k to a non-deductable tradtional IRA tomorrow (for 2012 and 2013) with income that has already been taxed, and then convert all of it to a Roth IRA with no further tax implications for 2012 or 2013?

soupcxan said:   ironfist99 said:   You have to pay taxes on the amount transferred during the tax year that you initiate the transfer. There are no limits on how much you can transfer at a single time, but you will need to pay taxes (as income) on the entire amount that you transferred during that tax year. If you are expecting a dip in income (and thus a reduction in tax rates) in one particular year, then it would be a good time to transfer the entirety of the IRA into a ROTH.

Wrong. There is no tax due on the transfer if you contribute to a non-deductible IRA and then convert it to a Roth. The money is already post-tax, there is no more tax to pay. Tax would only be due if you have other pre-tax IRAs out there that you must prorate with your non-deductible conversion (beware of this if you have a rollover IRA from a previous employer's 401k).


I should have read the OP more carefully. But you will still need to pay taxes on the earnings received on the non-deductible IRA. Of course this will be minimal if they contributed to the IRA and immediately converted it to ROTH.

absolutevo24 said:   Thanks for the quick reply ironfist.

All the funds I would be putting into a non-deductable traditional IRA (10.5k for 2012 and 2013) would have been taxed already. Wouldn't there be no need to pay taxes (as income) on the amount transferred/converted to a Roth IRA?

In other words, can I contribute 10.5k to a non-deductable tradtional IRA tomorrow (for 2012 and 2013) with income that has already been taxed, and then convert all of it to a Roth IRA with no further tax implications for 2012 or 2013?


Yes, assuming you don't have any other deductable IRAs or gains in the non-deductable account. See SoupXans reply for more details.

Soupcxan, BenH.

Trying to reconcile what you are both saying. If I can convert whatever is in a traditional IRA at any point, what is this 2012 conversion deadline?

In other words, can I contribute 10.5k to a non-deductable tradtional IRA tomorrow (for 2012 and 2013) with income that has already been taxed, and then convert all 10.5k to a Roth IRA with no further tax implications for 2012 or 2013?

Just to be clear, this is based on the assumption that you don't have any other traditional IRAs. If you do, then this may not be correct.

Yes, you can contribute $5000 after-tax to a tIRA now, as your Tax Year 2012 IRA contribution, and $5500 after-tax to a tIRA now, as your Tax Year 2013 IRA contribution, and then you can initiate a Roth conversion on that tIRA. The only tax implications you'll encounter is if your tIRA incurs gain during the time between your contributions and when the conversion is effected.

Thanks so much everyone! Sounds like i can go ahead with this (I do not currently have any IRAs - just a 401k).

This is all after-tax money, so the conversion is non-taxable (assuming you have no other traditional IRAs and you don't leave your money in the tIRA long enough to make a profit). The conversion will be a 2013 event since it will happen in 2013, not a 2012 event, but who cares? It adds $0 to your 2013 tax bill.

absolutevo24 said:   Soupcxan, BenH.

Trying to reconcile what you are both saying. If I can convert whatever is in a traditional IRA at any point, what is this 2012 conversion deadline?

In other words, can I contribute 10.5k to a non-deductable tradtional IRA tomorrow (for 2012 and 2013) with income that has already been taxed, and then convert all 10.5k to a Roth IRA with no further tax implications for 2012 or 2013?


Why you are making it that complicated?
Contribute for 2012 and 2013 in non- deductible IRA, convert week later whole account to Roth IRA.
Tax implications:
2012- form 8608, indicate 5k basis (basis is amount that not subject to additonal taxes)
2013 - form 8608, add 5.5k to basis and then subtract converted 10.5k in 2013. new basis is 0.
Pay taxes on difference of converted amount and 10.5k, should be zero or close to zero.

Done

look up form 8608- it is short and self explanotory.

absolutevo24 said:    If I can convert whatever is in a traditional IRA at any point, what is this 2012 conversion deadline?
In other words, can I contribute 10.5k to a non-deductable tradtional IRA tomorrow (for 2012 and 2013) with income that has already been taxed, and then convert all 10.5k to a Roth IRA with no further tax implications for 2012 or 2013?

There are two distinct steps, each with its own rules and deadline.

1. IRA contribution: You have till April 15 of 2013 to make a 2012 contribution. After that, you lose the opportunity for 2012 contribution for good.
2. Roth conversion: As of now, there is no income limit to be eligible. You can do the conversion at any time. Any taxes as a result of conversion will get assesses in the returns for the calendar year when the conversion took place. In your case, if there is not going to be any (or very little) taxes as a result of conversion, the date of conversion being in 2012 vs 2013 is probably not that important.

Form 8606. The 2012 8606 may show up a bit late this year depending on how the custodian processes tax forms for late contributions.

Is a Simple IRA or SEP-IRA included the same as a traditional IRA.

For example, if I have funds currently in a simple and a sep accounts and max out my simple for 2012. Can I put funds into a non-deductible IRA and then convert those funds into Roth without adverse tax penalties?

NVcheapster said:   Is a Simple IRA or SEP-IRA included the same as a traditional IRA.

For example, if I have funds currently in a simple and a sep accounts and max out my simple for 2012. Can I put funds into a non-deductible IRA and then convert those funds into Roth without adverse tax penalties?


Looks like not, see there line 6.

I just opened up a traditional IRA and Roth IRA at optionshouse.com.

1) There was no option for non-deductable traditional IRA - but I assume there is not a separate non-deductable tIRA account type; rather, it is classified as that if I fund it with already-taxed funds and don't deduct -right?

2) I assume it doesn't matter if I purchase stocks in the tIRA first - or simply transfer the 10.5k to the Roth IRA and then purchase stocks, correct?

Thanks!

absolutevo24 said:   I just opened up a traditional IRA and Roth IRA at optionshouse.com.

1) There was no option for non-deductable traditional IRA - but I assume there is not a separate non-deductable tIRA account type; rather, it is classified as that if I fund it with already-taxed funds and don't deduct -right?

There is no non-deductible tIRA. You make non-deductible contr. to a tIRA.

absolutevo24 said:   I just opened up a traditional IRA and Roth IRA at optionshouse.com.

1) There was no option for non-deductable traditional IRA - but I assume there is not a separate non-deductable tIRA account type; rather, it is classified as that if I fund it with already-taxed funds and don't deduct -right?

2) I assume it doesn't matter if I purchase stocks in the tIRA first - or simply transfer the 10.5k to the Roth IRA and then purchase stocks, correct?

Thanks!


1. It is a little more complicated that that. As others have stated, you must file form 8606 with your 1040 and declare it non-deductable.

2. Correct

MoneyOCD said:   NVcheapster said:   Is a Simple IRA or SEP-IRA included the same as a traditional IRA.

For example, if I have funds currently in a simple and a sep accounts and max out my simple for 2012. Can I put funds into a non-deductible IRA and then convert those funds into Roth without adverse tax penalties?


Looks like not, see there line 6.


I thought that was the case... No go for me... Thanks!


Opened a nondeductible tira in feb 2013 as a 2012 contribution. Transferred the nondeductible tira from custodian A to an existing roth ira at custodian B. Is this transfer the same as converting the nondeductible tira to a roth with custodian A and then transferring it roth to roth to custodian B? Or are there other implications due to the direct transfer from nondeductible tira at custodian A to roth ira at custodian B?

Also, for the interest earned on nondeductible tira, is that reportable on the 2012 or 2013 income tax return if the contribution was for 2012 but the interest was received in 2013?

I converted my entire traditional IRA to a Roth IRA last year and reported that on last year's tax return (2011). It was a former employee 401k IRA hence pre-tax. So I paid the taxes to convert the entire thing.
Fast forward to now and I want to do my maximum Roth IRA contribution for 2012 however my household income is now above the threshold to contribute to Roth. So I'd like to do the open traditional IRA and convert to Roth scenario.
Will I be hit with any tax since the money will now be all money I've earned and paid taxes on already? I'm pretty sure it won't but I want to make sure I report that correctly so I don't.

From my read of the "backdoor" ROTH IRA (RIRA) conversion, if you don't have any traditional pre-tax IRA's then a conversion from an IRA to a RIRA is not taxable, provided there are no gains. So basically if you were to contribute to a nondeductible IRA (NDIRA) and convert the entire amount of the NDIRA contribution immediately to a RIRA, you're in good shape. Unfortunately I found out about the complications of having a separate traditional IRA AFTER I did a RIRA conversion of my NDIRA contribution, not realizing my old employer 401k that I rolled over to an IRA would cause all kinds of problems.

Can anyone help walk me through what I need to do to fix my error? I currently have an IRA, let's say is worth $100k as of 12/31/11. I'm over the income limit to contribute directly to a RIRA or a deductible IRA. Here's what happened:

1. I made a $5k contribution to a NDIRA in calendar year 2012 for tax year 2011
2. Immediately after making the NDIRA, I converted the entire $5k to a RIRA...again this was in calendar year 2012
3. I filed form 8606 with my 2011 tax return, which showed the $5k NDIRA contribution on lines 1, 3, 5 and 14. I did not report anything else in "Part I" or "Part 2" of Form 8606.

Since I had a balance in an IRA as of 12/31/11, it sounds like I should have reported the value on Form 8606 line 6 and paid tax on the NDIRA to RIRA conversion as a result. Because I made the NDIRA for tax year 2011, but converted it to a RIRA in calendar year 2012, I'm confused when I need to pay the tax on the conversion.

Appreciate any help.

Given a choice to keep your Roth IRA conversion and pay taxes on most of it or undoing the transaction as if it didn't happen, which would you choose?

FWIW, here is my tax software support response to my previous question. Hopefully this helps others.

Your summary is correct you would not need to file an amendment for 2011 as you had no prior year basis. You also didn't have any distributions, withdrawals or conversion of any other IRA's you hold there for no prorated tax calculation is required. You 2012 1099-R would need to be reported on your 2012 return and you would need to calculate the taxable portion of your conversion amount using the Form 8606

jasmithvr6 said:   FWIW, here is my tax software support response to my previous question. Hopefully this helps others.

Your summary is correct you would not need to file an amendment for 2011 as you had no prior year basis. You also didn't have any distributions, withdrawals or conversion of any other IRA's you hold there for no prorated tax calculation is required. You 2012 1099-R would need to be reported on your 2012 return and you would need to calculate the taxable portion of your conversion amount using the Form 8606


You could consider the possibly to recharacterize the Roth IRA conversion and keep the $5000 as a Trad IRA.

Is your scenario for example:
- Had $100K in "rollover" (really Traditional) IRA with Charles Schwab on 12/31/2011 from an old 401k
- Made $5K non-deductible contrib to Fidelity Trad IRA on 3/1/2012 for tax year 2011
- Still have $100K "rollover" IRA with Schwab on 3/10/2012
- Converted $5k non-deductibe contrib at Fidelity to Roth IRA at Fidelity on 3/11/2012
- Still have $100K "rollover" IRA with Schwab on 3/12/2012

Have to confirm the math, but I think it makes sense for me to convert to Roth and benefit from tax free compounding.

Just moronic advice.....

If you have a TIRA already from a rollover or whatever, it does not benefit you to contribute because the IRS looks at this as the same.

Let's say you have a 95K TIRA rollover and contribute 5k to a separate TIRA then convert the 5K thinking you are tax free. Wrong! The amount converted is 5k or 1/20th of the total. Likewise the amount in after tax dollars is 1/20th of the total thus your tax exempt rollover is 1/20th of 5K or $250 bucks with you paying tax on $4750 with the rest of the after tax money growing in pretax accounts.

The way around this is to roll your TIRA into a 401K of your current job, then do the 5K and withdraw it. The catch is that you have to have the balance of 0 at 12-31 of the tax year. Net your investments will probably lost more than the tax free gain to 401k fees. Hence, not worth it.

Agree dmlavigne. I've mentioned to my FA, the possibility of rolling the TIRA into my current employer's 401k and avoid the tax implications of a ROTH conversion. I need to determine if the investment options in my 401k are doing better/worse than what my FA has me in. I'm sure he wouldn't be happy about losing a chunk of my business, but I'm not excited about paying $2k+ additional in taxes either.

If I leave the TIRA alone and continue to make $5k investments to it via non-deductible contribution, converting the $5k immediately to a ROTH, does that still make sense to pay the tax now and have it be tax free on all proceeds at retirement? I know it depends on individual situations and what your tax rate is now versus what it will be at retirement. Unfortunately my crystal ball is broken and I'm no longer able to predict what my situation will be in the future.

Do you maximize your 401k contributions to the limit?

Max out 401k every year.

Hello

I want to convert my Traditional IRA to Roth IRA.

I believe you have to convert all your traditional IRAs to Roth IRA together.

I have Annuity set up ( by transfering my 401K to Annuity ).

I believe that is considered like Traditional IRA. If I want to convert to Roth IRA, I have to break my annuity and convert that also ?

Thanks.



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