IRA Rules for 2011

  • Thread starter Dimitrios Paskoudniakis
  • Start date

D

Dimitrios Paskoudniakis

Thanks to a timely cashing out of non-IRA taxable investments last week, I
have a nice positive capital gain and am safely parked in a money market
mutual fund until ready to make my next move.

However, when combining the capital gain with my AGI projected for this
year, I will have MAGI greater than allowed to make a Roth IRA contribution.
I would love to buy low while the market is down.

My wife is a stay-home mom with no income, but my MAGI means she cannot buy
a deductible traditional IRA this year.

I'm reading Pub 970 and am trying to figure out some things that don't make
sense.

Unless I'm misinterpreting, I don't see why we can't each invest $5,000
(we're under 50) in a nondeductible traditional IRA, then convert to Roth,
perhaps the next day. If that's the case, why do the tax laws allow this,
but not a direct Roth purchase?

Is there an income limit or any other restriction precluding a nondeductible
traditional IRA contribution followed by immediate conversion to Roth?
 
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J

JoeTaxpayer

Is there an income limit or any other restriction precluding a
nondeductible traditional IRA contribution followed by immediate
conversion to Roth?
Not really. The warning I'd give you is this: If you have any existing
pretax IRA money, the new conversion is prorated to calculate the tax
due. If no pretax IRA, this is a great way to Texas two step to the Roth.

e.g. your existing IRA is all pretax and now worth $15K. You deposit $5K
and immediately convert. 3/4 of it is pretax money ($3750) and taxed.
This is why there's the need to first deposit to the IRA.
 
S

Steve Pope

JoeTaxpayer said:
If you have any existing
pretax IRA money, the new conversion is prorated to calculate the tax
due. If no pretax IRA, this is a great way to Texas two step to the Roth.

e.g. your existing IRA is all pretax and now worth $15K. You deposit $5K
and immediately convert. 3/4 of it is pretax money ($3750) and taxed.
This is why there's the need to first deposit to the IRA.
I'm not such a fan of Roth IRA's but I'm trying to understand the
concept you just described.

I thought that when you Roth-convert $5K, that $5K is then taxable (either
in the year of conversion, or if a special provision is in force, spread
out over possibly several tax years).

Why would only $3750 be taxable?

Steve
 
J

JoeTaxpayer

I thought that when you Roth-convert $5K, that $5K is then taxable (either
in the year of conversion, or if a special provision is in force, spread
out over possibly several tax years).

Why would only $3750 be taxable?
Roth conversions are only taxable to the extent then contain pre-tax
money. If one isn't able to deduct their IRA deposit, they track the
post-tax component. In my example for OP, the IRA had $20K, $5K post
tax. Therefore, on conversion, 3/4 taxable.

For those who couldn't deduct any deposits Roth conversion may result in
very little tax, as the cumulative post tax deposits are probably the
major portion of present value especially with the market moving
sideways these past ten years.

If you have no IRA at all, but a high income, you can deposit and
convert right to Roth with no tax due at all.

Steve, I'm not a 'fan' per se, in fact a google of 'RothMania' turns up
an article and comments I've made that it's over done. But, they have
their place. (a) for those above the pre-tax IRA limit, (b) conversion
for those in a very low income year compared to normal, (c) for those
already retired to "top off" their 15% bracket avoiding the growing RMDs
that may push them into 25%.

/Joe
 
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D

D. Stussy

Steve Pope said:
I'm not such a fan of Roth IRA's but I'm trying to understand the
concept you just described.

I thought that when you Roth-convert $5K, that $5K is then taxable (either
in the year of conversion, or if a special provision is in force, spread
out over possibly several tax years).

Why would only $3750 be taxable?
One still gets to allocate any non-taxed basis to the conversion.
Therefore, only pre-tax contributions (plus earnings, but as this is
uninvested cash, they are zero in this case) are taxed.
 

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