ROTH Conv from Trad IRA

[Burke]

Last year before 4/15/12, high-income client deposited $6K for both spouses (MFJ) into two separate traditional IRA's -- non-deductible -- for tax year 2011. He also deposited the same amt, $6K each, for 2012. Then he immediately converted to a ROTH (all accounts with the same company/custodian.) The money was moved from the trad IRA acct to an existing ROTH acct directly. He did not get a check or have possession of the funds. Now he has 2 1099-R's for $12K each for the distributions, code 7. Should the code have been G? Did the company handle this correctly? And do I show it as a rollover? Or does 8606 come into play? I can see him doing this every year. Until they eliminate this loophole.

[WhiteOleander]

I think you have to do the 8606. You have to show how much if any of the conversion is not taxable. The non dedcutible contribution should have generated an 8606 when the contribution was originally made. Now, you have to show that the conversion to the Roth is not taxable. There's no way for the IRS to know what portion if any of a conversion is taxable without the 8606.

[ddoshan]

Maybe I am missing something but why go from non deductible IRA to Roth. Why not just the roth account in the first place.

[BP.]

why go from non deductible IRA to Roth. Why not just the roth account in the first place.

TTB 13-13 & 14.
Roth contribution- AGI limits. Roth conversion- No AGI limits.

[Matt Sova]

Trad to Roth

If your AGI is too high you cannot make a Roth IRA contribution. One way around that is to make non-deductible Traditional IRA contributions and then convert them immediately to a Roth.

TAX TRAP - Unlike Roth IRA's where your basis comes out first, Traditional IRA distributions are prorated. So if your high income client has no existing Traditional IRA's, this can be done without any tax consequences. But, let's say they have traditional IRA's with a value of 94k (no basis) and they put 6k in (non-deductible) and then convert 6k to the Roth. They have just created a taxable IRA distribution of $5,640 (94% of the rollover). The remaining 6% or $360 is a tax free rollover to a Roth.

So, as you work through your 8606 you better hope that they do not have ANY existing Traditional IRA's anywhere.

[Burke]

If your AGI is too high you cannot make a Roth IRA contribution. One way around that is to make non-deductible Traditional IRA contributions and then convert them immediately to a Roth.

TAX TRAP - Unlike Roth IRA's where your basis comes out first, Traditional IRA distributions are prorated. So if your high income client has no existing Traditional IRA's, this can be done without any tax consequences. But, let's say they have traditional IRA's with a value of 94k (no basis) and they put 6k in (non-deductible) and then convert 6k to the Roth. They have just created a taxable IRA distribution of $5,640 (94% of the rollover). The remaining 6% or $360 is a tax free rollover to a Roth.

So, as you work through your 8606 you better hope that they do not have ANY existing Traditional IRA's anywhere.

He took care of that by converting all of them to a ROTH in 2010 when you could spread over 2 tax years. He does not miss a tax advantage. They were all non-deductible anyway, so he did have basis. Just the earnings got reported. But that is interesting to know. Not sure I was aware of that.

[Burke]

I think you have to do the 8606. You have to show how much if any of the conversion is not taxable. The non dedcutible contribution should have generated an 8606 when the contribution was originally made. Now, you have to show that the conversion to the Roth is not taxable. There's no way for the IRS to know what portion if any of a conversion is taxable without the 8606.

Right. After mulling it over, I figured that would be the case. In this situation, the contributions and the conversion all took place in 2012. So everything is on this year's return.