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ROTH rollover in 2010
Old 09-26-2009, 07:05 PM   #1
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ROTH rollover in 2010

Quick question regarding ROTH rollovers in 2010.

The way I understand the current tax code, next year, there won't be any income limits on ROTH IRA rollovers, is that correct? If so, is it just for 2010 or after that as well? Will a law need to be changed in order for it go into effect after 2010?

The reason I ask is because we recharacterized our 2008 ROTHs into non-deductible TIRA due to the fact that our MAGI was above the income phaseout limits. Prior to 2008, we were able to (and we did) contribute the max to our ROTHs. We will be above the income limits this year and hopefully next year as well, thus we'll be maxing out our contributions to non-deductible TIRA for 2009 and 2010.

I also understand that you only pay taxes on earnings when you rollover from TIRA to ROTH, correct?

If this is all correct, what we plan on doing is making our 2009 & 2010 non-deductible TIRA contributions in January of 2010 (it will hopefully be a total of 20k between the two of us). Then as soon as this is done, and in that same month of January, we'll rollover the 2008, 2009, and 2010 TIRAs into ROTH IRAs. I figure we'd only pay a small amount of taxes (mostly from the earnings of the 2008 TIRA) if we do it this way.

Depending on the value of the 2008 TIRA in January, we'll essentially have a 30k rollover.

Does this make sense and is it doable?


TIA for any comments, suggestions, concerns......
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Old 09-26-2009, 08:00 PM   #2
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This is a one time option, allowed in the current tax law.

Your plan is doable. To test out how much taxes you would pay, you can go to the IRS website and download form 8606. Follow the form from the top to the bottom and it will show you how much you owe.

You may also want to follow discussions at Fairmark.com.


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Old 09-26-2009, 08:22 PM   #3
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TIAA-CREF - Eligibility for Roth IRA Conversions Extended to All Investors

The elimination of income limits starts in 2010 and continues until changed.

If the only TIRAs you have are non-deductible, you will pay taxes only on the earnings.
If you have a mix of deductible and non-deductible TIRAs (which the IRS considers to be one big IRA), even tho you convert only the non-deductible ones, the IRS will consider that to a mix of deductible/non-deductible in proportion to the mix that you
hold and part of the contributions will also be taxed. Form 8606, as Rita mentioned, will calculate the taxable amount.
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Old 09-29-2009, 12:57 PM   #4
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Cons,
Here's an article from the Kiplinger website that answers your question: More Questions About Roth Rollover Rules - Kiplinger.com
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Old 09-29-2009, 06:26 PM   #5
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Not to hijack, but another facet of this rule change is that if you have after tax money in a 401(k), you can roll it over into a Roth, protecting all future earnings from taxes.

More Questions About Roth Rollover Rules - Kiplinger.com

I have about $100K in after tax contributions, so I intend to move this portion to a Roth next year.
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Old 10-01-2009, 08:10 AM   #6
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Thanks for the replies...

After reading the kiplinger article, I noticed it stated the following:

The income limit for Roth IRA conversions is permanently eliminated, but the special opportunity to spread the tax bill over two years applies only to conversions made in 2010.


This is the first time I've read this anywhere.....income limits for Roth conversions have been PERMANENTLY ELIMINATED?!?!? If true, this is great news for me and others in my situation as it creates a loophole to contribute to Roths in subsequent future years. I guess the author of the article put this statement in there as that's what the current tax code states...until it gets changed (hopefully that won't happen).


I found a Marketwatch article as well with some interesting comments:

Few savers plan to switch to Roth IRA: survey - MarketWatch
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Old 10-01-2009, 04:57 PM   #7
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Quote:
Originally Posted by cons View Post
If true, this is great news for me and others in my situation as it creates a loophole to contribute to Roths in subsequent future years.
Yes. Each year, contribute to a non-deductible traditional IRA and immediately convert to a Roth. No (or very little) taxes, because there wouldn't have been enough time for earnings while in the traditional.
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Old 10-01-2009, 07:29 PM   #8
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Quote:
Originally Posted by gindie View Post
Yes. Each year, contribute to a non-deductible traditional IRA and immediately convert to a Roth. No (or very little) taxes, because there wouldn't have been enough time for earnings while in the traditional.
Why would one do this? You are paying taxes on the small amount of earnings when you contribute, AND you are limited to the amount you can contribute. Instead, one could put the same amount into the Roth directly and pay no taxes at all.
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Old 10-01-2009, 09:43 PM   #9
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Originally Posted by Gotadimple View Post
Why would one do this? You are paying taxes on the small amount of earnings when you contribute, AND you are limited to the amount you can contribute. Instead, one could put the same amount into the Roth directly and pay no taxes at all.
Because after reading cons' quote, I assumed he also exceeded the income limits for contributing to a Roth. Remember, in 2010, only the conversion income limits are eliminated.

So, to bypass the contribution income limits for a Roth, first contribute to a non-deductible traditional (never any income limits) and then convert (no income limits in 2010 and after).
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Old 10-02-2009, 07:45 AM   #10
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Originally Posted by gindie View Post
So, to bypass the contribution income limits for a Roth, first contribute to a non-deductible traditional (never any income limits) and then convert (no income limits in 2010 and after).
This is our situation as well. Given the Texas-sized loophole it'd be nice for the govt to just eliminate the Roth income limits instead of having everyone jump thru hoops each year....
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