conversion into Roth, then deductible IRA during 2010

[OtisMozzetti]

Taxpayer wants to convert a $10,000 market value traditional IRA into a Roth IRA on Jan. 4, 2010. The traditional IRA has zero basis since the contributions have always been properly deducted. Taxpayer and spouse (each age 50) will have other 2010 income of $110,000, including $6000 of "compensation" for IRA purposes, on an MFJ return.

Neither taxpayer nor spouse is covered by any employer retirement plan, so contributions to a traditional IRA may be deducted as an adjustment to income. Taxpayer also wants to make a 2010 contribution, and to deduct, $6000 into a traditional IRA on May 3, 2010.

How much taxable income will result from the IRA conversion, and during what year(s) may that income be recognized? How much deduction is allowable for the $6000 contribution to a traditional IRA?

[Lion]

Form 8606

You're probably going to have to work through the forms if your client is going to convert in the same year as a contribution. I just read something about that, but my short term memory hasn't kicked in today. Accountants' World maybe. It's most complex if basis, but that's not the case for your clients. Hope someone else jumps in with information for you. When I find the recent article, I'll come back and post.

[Lion]

Link

http://www.foxbusiness.com/story/personal-finance/financial-planning/avoid-roth-conversion-tax-surprise/

It was a link on yesterday's Accountants' World e-newsletter to a Monday story on Fox Business.

[newbie]

My answer would be the $10,000 conversion would be taxable $5,000 in 2011 and $5,000 in 2012 and the $6,000 contribution to the traditional IRA would be deductible in 2010. Am I missing something?

[OtisMozzetti]

just checking whether I am missing something

My answer would be the $10,000 conversion would be taxable $5,000 in 2011 and $5,000 in 2012 and the $6,000 contribution to the traditional IRA would be deductible in 2010. Am I missing something?

That's exactly what I want to check. I do understand that the $5,000 in 2011 and $5,000 in 2012 is optional, i.e. one could choose to simply report all $10,000 during 2010.

I am still not certain whether, myself, I am missing something.

[OtisMozzetti]

When I find the recent article, I'll come back and post.

Thank you, Lion, for your help.

[Lion]

Jon

Jon read Otis' thread here, also.