IRA conversions and deductions during 2010

[OtisMozzetti]

Most of us have heard that during 2010, the $100,000 MAGI income limit on converting traditional IRAs into Roth IRAs will be removed. The taxable income resulting from the conversion may be reported either during 2010, or else may be split 50%/50% between 2011 and 2012.

Two questions still come to mind:

1. What if the taxpayer, for example one not covered by an employer plan, contributes to a traditional IRA and has always been allowed to take an adjustment to income (deduction) for that contribution? Can that deduction still be taken? Is that true even if all or part of traditional IRAs are converted into Roth during 2010? Can the traditional IRA, or some portion of it, be converted into a Roth IRA at some time after the traditional IRA receives the contribution? Would the option to recognize the income from the conversion into a Roth IRA 50%/50% during 2011 and 2012 still apply?

2. What if a taxpayer who has too much income to contribute to a Roth IRA instead makes nondeductible contributions to a traditional IRA and later converts all or part of that traditional IRA to a Roth IRA? Is that a roundabout way to allow there to be no income limit on contributing to a Roth?

[Corduroy Frog]

"Back Door" into a Roth

Otis, I would call your situation #2 an acceptable "Back Door" to have a Roth and escape the income restriction. I can't find anything which prevents this.

However, your example creating a non-deductible but conventional IRA also creates a BASIS in the IRA. Must the conversion to a Roth be fully-taxable because of the "Back Door" approach?

Example: Richie Rich consistently reports an AGI between $300,000 and $500,000. During these high income years, he is allowed to create a conventional IRA, but it is non-deductible.

Assume he now has contributed $45,000 to this IRA over the years, and it is now worth $80,000. If he cashes out the IRA, he will be taxed on only $35,000. Question: If he converts to a Roth, is he still allowed to exempt his $45,000 contribution??