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My Roth IRA conversion plans have just been destroyed
Old 02-12-2011, 03:48 PM   #1
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My Roth IRA conversion plans have just been destroyed

DW and I make too much to fund a Roth, and we are both covered by 401k's at work so no deductible IRAs are allowed either. I thought I could fund non-deductible IRAs and then convert to Roths since the income limit changed in 2010.

However, I just learned that even if you only convert post-tax dollars, your conversion gets taxed pro-rata across all of your IRAs including the pre-tax ones. Since I have a rollover IRA from a previous 401k plan, I'd be accelerating the tax on a portion of that.

At this point I'm not even sure there's a point to funding non-deductible IRAs, since my only plan for them was to convert to Roths. I guess I should still do it now, and bring up the tax on the rollover plan later when we are in a lower tax bracket.

You really have to love how the gov't discourages people from saving.

http://www.investmentnews.com/articl.../REG/301319991
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Old 02-12-2011, 04:47 PM   #2
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You've just been means tested and denied a gov't benefit lower income folks receive. Welcome to the New Age. Get ready for more. Change is good.
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Old 02-12-2011, 04:48 PM   #3
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Just put it in a tax-efficient equity fund. The gain will be deferred until you start to take money out.
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Old 02-12-2011, 05:36 PM   #4
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Will your current 401K accept a rollover of your former 401K? That would make it "invisible" to the prorata rule and allow you to do what you want.

homework: strategy 4 here http://fairmark.com/rothira/09030801-401k-basis.htm
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Old 02-12-2011, 06:23 PM   #5
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Quote:
Originally Posted by kaneohe View Post
Will your current 401K accept a rollover of your former 401K? That would make it "invisible" to the prorata rule and allow you to do what you want.
Also known as a backdoor Roth.
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Old 02-12-2011, 07:17 PM   #6
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I opened and started contributing to a non-deductible two years ago and last year, I moved my rollover IRA into my current 401K like kaneohe said (My current 401K allowed it), and then converted my non-deductible IRA to Roth.

I intend to do this every year.
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Old 02-12-2011, 07:32 PM   #7
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Another thing to consider is that your Rollover IRA does got affect your DW's situation so you can make after tax contributions to a TIRA for her and then do a ROTH rollover and it will be done on her basis only.

My DW has a lot of before tax money in her Rollover IRA from a few years ago when she ESR'ed and did rollovers from her 401k and pension plan. I ER'ed last year and also rolled my existing non-deductible TIRA to a ROTH as my 401k and DW's IRA's are not used in the calculation. I then rolled over my 401k this year.
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Old 02-13-2011, 11:14 AM   #8
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Quote:
Originally Posted by kaneohe View Post
Will your current 401K accept a rollover of your former 401K? That would make it "invisible" to the prorata rule and allow you to do what you want.

homework: strategy 4 here Isolating 401k Basis for a Conversion
I hadn't considered this, but it does appear to be a way to get around the issue. Thanks.
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Old 02-13-2011, 12:18 PM   #9
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When I was in a similar situation, I went ahead and funded the non-deductible IRA anyway. When I eventually RE, I expect to have some years with low income for tax purposes and will convert the traditional IRAs piecemeal at that time. It's awkward and contrived, but my thought is that tax advantaged space is scarce and once you miss a year you cannot get it back. I have to make do as best I can with what I qualify for.
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Old 02-14-2011, 04:29 PM   #10
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Quote:
Originally Posted by soupcxan View Post
I thought I could fund non-deductible IRAs and then convert to Roths since the income limit changed in 2010.
I guess I should still do it now, and bring up the tax on the rollover plan later when we are in a lower tax bracket.
You really have to love how the gov't discourages people from saving.
Quote:
Originally Posted by soupcxan View Post
I hadn't considered this, but it does appear to be a way to get around the issue. Thanks.
I think that the conversion is worth doing when you're in a lower tax bracket.

You're right, without all the details it's difficult to give generic advice without running afoul of some niche in the tax code. But rather than discouraging saving, I think it discourages tax-deferred saving...
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Old 02-14-2011, 06:05 PM   #11
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+1 on the IRA rollover to your current 401K. I am slowly eliminating all nonRoth IRA through rollovers.

If your employer doesn't accept rollovers, you could generate some side business income, set up your own 401K, and then rollover the IRA money into that. With your own 401K you can decide on your own investment options, and buy things you can't normally buy through company plans, such as TIPS.
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