Roth IRA contribution, AGI workaround

[DaveinTexas]

First off, I hope everyone survived the mad rush of your client's this past week. I had a few clients tell me, "I was up until midnight getting this together!" on October 17th!!! Come on people!

Anyway, I had a thought and have done a bit of research on this subject and I wonder when the loophole will be closed. If you have a client whose AGI is too high to contribute to a Roth IRA there may be another option for them. They could contribute to a Traditional IRA, make the election to deem it a non-deductible contribution (retaining cost basis), and then convert it to a Roth IRA. There may be a bit of tax on any earnings but this is a legitimate workaround if the AGI is limiting their regular Roth contribution. And, since there is no AGI limitations on the Roth conversions anymore, this strategy works.

Does anyone know of any limitations/disadvantages to this strategy? I can't seem to find the income limitations of a conversion made in 2012.

Have a great winter everyone!

[JohnH]

I had a client who did that last year on the recommendaiton of their financial advisor. I thought it was a pretty smart move.

[FEDUKE404]

Mixed blessing

But then you (or someone) have to deal with that doggone Form 8606 forever and a day...

FE

[DonPriebe]

Note that this only works (cleanly) if the client does not have any other traditional IRA accounts before you make the contribution. Otherwise you need the 8606 to figure out the taxability of the conversion.

[DaveinTexas]

That is correct

Note that this only works (cleanly) if the client does not have any other traditional IRA accounts before you make the contribution. Otherwise you need the 8606 to figure out the taxability of the conversion.

This works really well if the client has never started a Traditional, maybe had a Roth in the past, and has too high of an AGI to contribute to his Roth.

[JohnH]

My client already had some $ in a traditional IRA from long ago, plus about 3 recent years of non-deductible IRA's. So we were already doing the Kabuki dance with the 8606. In 2010 both spouses did a non-deductible IRA, then converted everything to Roths. the math was a little wierd, but we cleared the decks in 2010. Well, except for the addition to income for the next 2 years, and then we're done (I think)

But I can see how it would complicate things if they had only coverted part of the existing IRA's to Roth. That would really gum up the works for years to come.

[joanmcq]

Yes, when the conversion AGI limit was lifted, I explained the strategy to my sister, thinking her husband might be able to use it. Alas, he had converted 401(k)s to IRAs upon leaving jobs. The strategy worked best if you started the nondeductible IRAs a few years ago. None of my clients qualified, since all that could use this strategy had too much in IRAs.

But I did have one convert a substantial chunk in 2010 because we projected taxable income of zip without the conversion, and she qualified for FTHB. I love clients that plan!