Interesting Twist on Roth Conversions

[JohnH]

Client's income is too high to make a Roth IRA contribution for 2009 and they are covered by a retirement plan at work. However, their financial planner suggested opening a non-deductible IRA for 2009 before Apr 15, 2010 and then immediately converting to a Roth. We would report the non-deductible IRA contribution on the 2009 return normally and the Roth conversion in 2010 would not incur any tax liablity (unless there were some small amount of earnings to accumulate duringthe process).

He says they can also do this same process anytime for the current year and thus relieve themselves of being concerned about having to pull money out in Apr 2011 if their income exceeds the Roth IRA phaseout.

Good thinking, I think...

[Possi]

Conversion disallowed?

My client converted from a traditional to a ROTH but the 1099 was a simple distribution with the box 7 code 2, early and no penalty.

Playing with the program, I entered it as it was written and there was no problem.

Then I put it in as a conversion from traditional to ROTH and BAYUM! BELLS AND WHISTLES AND RED FLAGS AND 8606 POPS UP! ABORT ABORT!! DISALLOWED!

So, I went back to my original entry with a prayer and a chant and I burned a little incense.

hummmmmmmmmm

[JohnH]

Was their income over the allowable conversion limits in 2009?

[BP.]

Neat little trick; just finished with a client who employed it.

In researching the 2010 Roth conversion situation, the question arose whether the tax is spread out over two yrs in 2011 & 2012, or whether the income from the conversion is spread out over two yrs. Found in TTB that it is the income that is spread out, which is relevant as it relates to tax brackets the clients may be in.

[Possi]

over 100k

Was their income over the allowable conversion limits in 2009?

yes, their income is 110k without the 5k that was designated on the 1099r code 2. 115k including that as income.

[Possi]

My conversions in 2010

Neat little trick; just finished with a client who employed it.

In researching the 2010 Roth conversion situation, the question arose whether the tax is spread out over two yrs in 2011 & 2012, or whether the income from the conversion is spread out over two yrs. Found in TTB that it is the income that is spread out, which is relevant as it relates to tax brackets the clients may be in.

So, I converted in 2010. Will I have the option on my 2010 return, to take the hit or spread it out over 2 years? I did the federal withholding, so will that be credited completely to 2010 regardless?

Looking ahead...

[JON]

Remember with nondeductable

IRAs being converted to Roths, you add up ALL IRA accounts will be the denominator and the numerator wil be that portion of the IRAs that were nondeductable times whatever portion you roll. You do not get to select $6,000 IRA to convert that was non deductable and say it is exempt from tax it you have other IRAs.

[JohnH]

Jon:
Thanks for that input.
This applies in at least one situation I'm dealing with.