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Nondeductible IRA Contribuiton Converted to Roth

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    Nondeductible IRA Contribuiton Converted to Roth

    Taxpayer's income is above the limits to contribute to a Roth IRA. Taxpayer instead makes a nondeductible contribution to traditional IRA, then the next day converts the amount to a Roth.

    My question is if anyone knows of specific situations where the IRS is applying the step transaction doctrine to these conversions and treating them as improper Roth contributions?

    I've heard rumors this is occuring, but have nothing concrete. There are obviously lots of opinions on either side as to whether this type of transaction is legitimate, but I'm more interested in whether someone has actual knowledge of IRS action on this issue.

    #2
    Under the law as it is currently written, this is a permissible transaction. Now, Congress probably did not intend it to be so, but it is they who must make the change. The IRS cannot do it. I have not heard of anything regarding their disallowing it if the proper procedures are followed. Based on the step transaction doctrine, while it meets the end result test, I do not believe it meets the interdependence test, nor the binding commitment tests.
    Last edited by Burke; 04-23-2014, 11:58 AM.

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      #3
      I've got clients doing this too. Yours might want to wait a short period rather than doing it the next day.

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        #4
        The fun comes next tax season when figuring the taxable amount. (grin
        ChEAr$,
        Harlan Lunsford, EA n LA

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          #5
          Roth to Non deductible back to Roth

          Try the research of the Back Door. From what I understand it is legal and trying to learn more about it. To record it, still learning.

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            #6
            Back-door Roth is perfectly fine. Just prior to this past tax season, I was reading how Congress might shut it down.

            It only works effectively when the taxpayer has no other funds in an existing traditional IRA.

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