Can I do a Roth IRA conversion if my AGI is over the Roth limit?

[starsfan18]

I'm hoping somebody here can help me answer this question. I'll state in advance that I know that tax advice given here is no substitute for consulting a licensed professional, so keep that in mind before you respond with a generic "consult a CPA" answer.

My wife and I will have an AGI over the Roth contribution limit this year. I've read some information on the Web that indicates that the AGI limit for Roth conversions is no longer in effect as of 2010. If this is true, I'd like to do the following:

1. Contribute the maximum amount for both of my wife and myself to traditional IRAs for the 2011 tax year.
2. At some point in the future, convert those 2011 Traditional IRA contributed funds to Roth status.

Does anyone here know if this is possible? I've been having a hard time finding a definitive answer.

 

[GrayHare]

As of 2010 income limitations on conversions of tIRAs to Roth were lifted, so yes, your plan sounds doable. Of course it is unknown if allowance of such conversions will eventually be rescinded.

 

[starsfan18]

My next question would be how long the funds have to stay in a Traditional IRA before they can be converted to Roth. If there's no waiting period, then having an AGI limit for Roth contributions doesn't make any sense at all. That's the part of this plan that I'm the most uncertain about.

 

[GrayHare]

There's no waiting period, and yes, it's quirky, see http://www.early-retirement.org/for...utions-still-allowed-in-2012-right-59344.html

 

[growing_older]

Be careful if you do this because any other money you have in any other Traditional IRA has to be proportionally represented in the conversion.

 

[thefinancebuff]

Here's the proper way to do it: The Backdoor Roth IRA: A Complete How-To - The Finance Buff

 

[Onward]

Be careful if you do this because any other money you have in any other Traditional IRA has to be proportionally represented in the conversion.

I'm looking through IRS docs for this rule, but can't find anything. Can you give some reference?

Here's the proper way to do it: The Backdoor Roth IRA: A Complete How-To - The Finance Buff

He seems to refer to the same rule as the "pro-rata" rule. Can someone point me to it in IRS docs? I've had no luck searching irs.gov.

 

[thefinancebuff]

He seems to refer to the same rule as the "pro-rata" rule. Can someone point me to it in IRS docs? I've had no luck searching irs.gov.

Publication 590 (2011), Individual Retirement Arrangements (IRAs)

 

[Onward]

Publication 590 (2011), Individual Retirement Arrangements (IRAs)

That's where I started. Just went through it again and didn't see any mention of the "pro-rata" rule, or whatever it might be named. Thanks in advance to anyone who can point me to it.

 

[thefinancebuff]

That's where I started. Just went through it again and didn't see any mention of the "pro-rata" rule, or whatever it might be named. Thanks in advance to anyone who can point me to it.

It may not have that name officially but if you go through the worksheet, you will see how the ratio is calculated on line 7 and how it applies to a distribution/conversion to figure out how much is taxable.

 

[RE2Boys]

I'm sure Pub 590 references Form 8606 which you must file to establish a basis in a Traditional IRA and file when you do any T-IRA to Roth conversion. If you study the form, you'll find that your basis is spread over ALL T-IRA accounts that you own. So if you convert only 10% of your total T-IRAs to Roths, you are deemed to have only used 10% of your basis (basis=non-deductible portion of ALL your T-IRAs) and hence only 10% of the conversion is not taxable. Hope, for any non-deductilbe IRA contributions, you have been filing Form 8606 each year, or the IRS may conclude you have no basis in a T-IRA because you didn't report it.

 

[Alan]

Off the top of my head I believe you are too late for 2011 to do a ROTH conversion. Although you can make IRA contributions for 2011 through April 15, any ROTH conversions had to be completed by year end.

A quick search shows:

The shortest answer is that, for any given year, the deadline for a Roth IRA conversion is December 31 of that year. (Note: This is different from IRA contributions, which can be made up until April 15 of the following year.)

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[starsfan18]

Off the top of my head I believe you are too late for 2011 to do a ROTH conversion. Although you can make IRA contributions for 2011 through April 15, any ROTH conversions had to be completed by year end.

A quick search shows:

Thanks for this heads-up!

 

[thefinancebuff]

Off the top of my head I believe you are too late for 2011 to do a ROTH conversion. Although you can make IRA contributions for 2011 through April 15, any ROTH conversions had to be completed by year end.

But it's perfectly OK to contribute for 2011 in 2012 and convert in 2012. You just have to report the contribution on 2011 return and report the conversion on 2012 return. A slight inconvenience but it's still worth doing for the tax-free earnings.

 

[justplainbll]

Be careful if you do this because any other money you have in any other Traditional IRA has to be proportionally represented in the conversion.

Check out Form 8606 and it's instructions.

 

[Onward]

Ok. I see the pro-rata rule in action on the 8606. It looks as though it applies only if you have basis in your traditional IRAs, which I don't. I was thinking it applied to all conversions.

 

[youbet]

Ok. I see the pro-rata rule in action on the 8606. It looks as though it applies only if you have basis in your traditional IRAs, which I don't. I was thinking it applied to all conversions.

Your TIRA's have 100% pre-tax (deductible in the year you made the contribution) dollars?

 

[Nords]

That's where I started. Just went through it again and didn't see any mention of the "pro-rata" rule, or whatever it might be named. Thanks in advance to anyone who can point me to it.

Ok. I see the pro-rata rule in action on the 8606. It looks as though it applies only if you have basis in your traditional IRAs, which I don't. I was thinking it applied to all conversions.

I was asking these types of questions on Ed Slott's IRA discussion board about 5-6 years ago. One of the CPAs eventually gently suggested that I was over-thinking it and should just start plugging the numbers into the $%^&ing form 8606, at which point everything would make sense.

They were right, and once I'd worked through the form I was able to iterate the numbers to get what I wanted.

 

[Onward]

Your TIRA's have 100% pre-tax (deductible in the year you made the contribution) dollars?

Yes. I never saw much point to after-tax contributions to a T-IRA. No tax deduction up front, more recordkeeping, and no cap-gains tax break on withdrawal.

 

[youbet]

Yes. I never saw much point to after-tax contributions to a T-IRA. No tax deduction up front, more recordkeeping, and no cap-gains tax break on withdrawal.

Well, there is the issue of having TIRA dollars to convert to a Roth. About half of what I'm converting are post tax dollars which wouldn't have been there to convert with your line of thinking. Other than that, I generally agree.

 

[Onward]

Well, there is the issue of having TIRA dollars to convert to a Roth.

Right.