Got an interesting email the other day regarding how to get money into a Roth IRA when you have a high income:
Actually what I am trying to understand is pretty simple: is it legal to convert non-deductible IRA to Roth and how the tax gets calculated.
Please let me know if you can keep the rate below $50.
SEND A CHECK TO 4501 S. CENTINELA AVE., LOS ANGELES, CA 90066
Both me and my wife work and with our combined income we don't qualify for Traditional IRA deduction. Earlier this year I made some contributions to our Roth accounts. I recently changed jobs and my new base pay and bonus would puts us above the income limit for Roth.
I HAVE SEEN THIS BEFORE. BASICALLY WHAT YOU CAN DO IS MAKE A NON-DEDUCTIBLE TRADITIONAL IRA DEDUCTION AND THEN MOVE THAT MONEY INTO THE ROTH IRA. YOU DON'T HAVE TO PAY TAX (EXCEPT TO THE EXTENT OF ANY EARNINGS IN THE ACCOUNT) BECAUSE YOU HAVE ALREADY PAID INCOME TAX ON THE TRADITIONAL IRA DEDUCTION AMOUNT CONTRIBUTED. IT IS A BIT ON THE TRICKY SIDE STRATEGY BUT THERE IS NOTHING UNETHICAL OR ILLEGAL ABOUT IT WHATSOEVER (TO THE BEST OF MY KNOWLEDGE AND AS OF THIS WRITING ON JULY 31, 2013).
- Is it possible for me to contribute to a non-deductible IRA and convert it to Roth?
SEE ABOVE, AND KEEP IN MIND THAT THE *TOTAL* ALLOWABLE IRA CONTRIBUTION CANNOT BE EXCEEDED.
- How is the tax calculated during conversion? It seems the tax is calculated based on all IRA earning - but what is the time period over which the earning is calculated - i.e., is it earning so far in 2013 or just for the number of days between the conversion. For example, if I make non-deductible contribution on June 1st & convert to Roth on June 15th, do I look at all the earnings so far in 2013 or just between June 1st to 15th?
YOU WOULD PAY TAX ON ANY EARNINGS FROM THE CONTRIBUTION DATE TO THE CONVERSION DATE.
- For the money that I have already contributed to 2013 Roth, can I covert it to non-deductible IRA and then back to Roth?
YOU CAN GIVE IT A TRY, SURE; EITHER WAY YOU HAVE ALREADY PAID TAX ON THE MONEY; CONSULT WITH A LICENSED FINANCIAL ADVISER FOR ANY SPECIFIC INVESTMENT ADVICE, YOU MAY ALSO CONSIDER PUTTING IN A CALL TO THE INTERNAL REVENUE SERVICE AND ASKING THEM, IF SO PLEASE MARK DOWN THE BADGE ID NUMBER OF THE REPRESENTATIVE WITH WHOM YOU SPEAK.
DOES THIS HELP?
THANKS AND I'LL KEEP AN EYE OUT FOR YOUR CHECK TO BE MADE OUT AND PAYABLE TO "PRONTO INCOME TAX."