Roth IRA multiple transactions - Help needed

[FEDUKE404]

In 2008, client transferred funds from a traditional IRA to a Roth IRA, expecting that to be a taxable event. Later that year, due primarily to market conditions, those funds (or what was left of them) were recharacterized and returned to the traditional IRA. The appropriate Forms 1099-R were generated. Although I did not prepare the 2008 return, it appears that after all the dust had settled that there was no taxable event shown on the Form 1040. There was no Form 8606 present. (To the best of my knowledge, client has never needed to file a Form 8606.)

During 2009, the client once again transferred funds into a Roth IRA and left them there. A taxable event (all taxable?) is expected, with a Form 1099-R "code 2" in hand.

For calendar year 2009, the client also placed $5k of "new" funds into the same Roth IRA. Aside from any income limitations (it's gonna be close!) prohibiting such, does the transfer of the former traditional IRA funds into the Roth IRA account during 2009 in any way limit/restrict whether the $5k can also be placed into the account? (This would include the being over the $5k limit issue as well as the "increase" in income specifically attributable to the Trad to Roth transfer.)

Further: There may be funds remaining in the traditional IRA account, and there may have been (but probably not) funds in the Roth IRA account prior to these recent actions. Do either of these possibilities impact the 2008/2009 tax situations?

I've pretty well done my homework, but my head is spinning trying to figure this stuff out. I thought perhaps some "real world" input from TTB members might clarify things.

At the present time I think 2008 has been laid to rest and for 2009 the funds transferred into the Roth IRA will be fully taxable and the client can also put $5k of new money into the Roth IRA account. (This precludes having made "too much" money in 2009 and having to start the process anew.....)

Thanks in advance to everyone for your advice. I know you, like I, am quite busy these days!

FE

[BOB W]

Readers would need to know the t/p AGI before Roth contribution and the amount of the IRA/Roth rollover.

[FEDUKE404]

Numbers

Readers would need to know the t/p AGI before Roth contribution and the amount of the IRA/Roth rollover.

AGI is currently just above $100k (single) exclusive of Roth conversion income and Trad -->> Roth amount is ~$9k.

Can't go any further due to privacy considerations. We are talking in somewhat general terms here.

FE

[BOB W]

AGI is currently just above $100k (single) exclusive of Roth conversion income and Trad -->> Roth amount is ~$9k.

Can't go any further due to privacy considerations. We are talking in somewhat general terms here.

FE

His Roth contribution may be limited and it doesn't look like he is eligible for an IRA to Roth rollover. (AGI above $100,000).

http://retireplan.about.com/od/iras/a/IRA_2009_limits.htm

ADDED: I reread your post several times and your primary issue is the contribution of new money into his Roth. Other than income issues there should be no restrictions. But your client could have several problems with other income "above $100,000.. Client needed to wait for 2010.

[JohnH]

Back to a discusison we had yesterday, why not abandon the idea of a Roth contribution for 2009 altogether? Just put money into a non-deductible IRA for 2009 by Apr 15, 2010, then do a Roth IRA conversion any time in 2010. It has the same effect and you don't have to worry about income limitations on the Roth IRA contribution for 2009.

He can do the same with his 2010 contribution. Put the money into a non-deductible IRA and then convert to the Roth in 2010. Again, no worries about the 2010 income limitation by putting the money into the non-deductible IRA before conversion to the Roth.

[FEDUKE404]

AGI issues ?

His Roth contribution may be limited and it doesn't look like he is eligible for an IRA to Roth rollover. (AGI above $100,000).

http://retireplan.about.com/od/iras/...009_limits.htm

I am fully aware of the income limits for both new Roth money and transfers to Roth account.

The problem is that when the "income" from the conversion is removed, the client apparently falls below the threshold levels for limiting either a transfer ($100k) or new money ($105k and definitely below $120k).

It's the "chicken vs the egg" syndrome.

Also, I think there is merit to resolving the complete definition of modified AGI which applies to these limits!

FE

[BOB W]

I am fully aware of the income limits for both new Roth money and transfers to Roth account.

The problem is that when the "income" from the conversion is removed, the client apparently falls below the threshold levels for limiting either a transfer ($100k) or new money ($105k and definitely below $120k).

It's the "chicken vs the egg" syndrome.

Also, I think there is merit to resolving the complete definition of modified AGI which applies to these limits! FE

To the best of my knowledge, which has it own limitations, the rollover amount does not figure into the $100,000 limitation. But does the new contribution need to include the rollover, I don't know. As John said, Make a
non deductible IRA contribution and deal with it in 2010.

[JohnH]

Does the right-top of page 13-13 help answer the question?

"Modified AGI for Roth IRA purposes is AGI minus...conversion income ... and MRD from an IRA." Then there are some add-backs to consider.

[FEDUKE404]

Roth OK - transfer ??

Information I have tends to indicate that the "taxable amount" of the Trad -> Roth activity does NOT enter into the calculations of AGI limits for new ($5k) Roth money. That includes TTB info.

The jury is stll somewhat out as to whether the same conversion dollars would or would not be figured into the limits for the actual conversion itself. "Before" any conversion client is under dollar threshold but "with" the conversion he is (probably) over the conversion threshold.

As for nondeductible IRA considerations (and a lifetime of Form 8606 agonies) that would really be WAY down the list for both my client and me. Since the 2009 funds are already in a Roth account, that choice could be a further mess to resolve.

Now you know why I absolutely loathe Roth manipulations and/or "smart" clients who get creative with their Roth account......

FE

[JohnH]

Keep in mind I'm not suggesting the non-ded IRA as a permanent measure. If it's immediately converted to a Roth, then there's only one year the 8606 would need to be filed. The non-ded IRA is just a means to an end.

I was suggesting using this method for the 2009 ONLY if there's an income limitation for 2009 requiring withdrawal of some or all of the funds in the 2009 Roth because I thought you might be on the border with that issue. The amount required to be withdrawn could then be cycled through the non-ded IRA and converted back to a Roth IRA in 2010.