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Question re Roth IRA Conversion
Old 10-23-2010, 09:26 PM   #1
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Question re Roth IRA Conversion

I have a traditional IRA which was funded with tax deductible contributions many years ago. I stopped contributing once I was no longer able to deduct the contributions. Currently I am not elligible to contribute directly to a Roth IRA because my income exceeds the elligibility limits. This year, am I able to make a $5000 non-deuctible contribution to a traditional IRA, and the immediately convert it to a Roth IRA? If I do this, I assume that I will owe no taxes on the conversion as I will only be pulling out the $5000 I put directly into the traditional IRA. Seemed that this was a backdoor way for me to make a contribution to a Roth. Anything I am missing?
Thanks!
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Old 10-23-2010, 10:38 PM   #2
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Check out form 8606 http://www.irs.gov/pub/irs-pdf/f8606.pdf which you will need to file for your non-deductible contribution and also to calculate the tax on conversion. Although you can convert as you suggest, IRS considers all your TIRA accounts as one and you will have to treat the amount you convert as a mix of both deductible and non-deductible contributions ...the deductible part will be taxable.

Pls note that form is for 2009. Add 1 to all the year dates for 2010.

http://www.investmentnews.com/articl.../REG/301319991

You may also want to explore this idea:
“Isolating basis” (the non-deductible contribution amount) can be
accomplished by rolling pre-tax IRA portion into employer plan or solo
401(k). You thus will in effect be ‘hiding’ that portion from inclusion in the
conversion tax calculation, and voila, the Roth conversion of the after-tax
only portion will be tax free – pure gold. But tread very carefully.
(I don't know what the tread very carefully entails).

see strategy 4 here: http://www.fairmark.com/rothira/09030801-401k-basis.htm
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Old 10-24-2010, 05:51 AM   #3
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Thank you very much for the references.
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Old 10-24-2010, 08:47 AM   #4
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btw.......if you decide to explore the isolation of basis concept, pls be sure to run it by somebody who really knows that stuff.......one suggestion is Alan S. at the fairmark.com forums (retirement subforum). He seems to respond to most of the questions so you don't have to ask for him specifically.
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