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I knew about that... but this has me curious. If this were done using the income I mentioned in my previous post (no tax advantage) would the conversion incur a double tax (both in and out)?
No, you would not get double taxed. If you open an traditional IRA with a contribution that was not tax-deductible and immediately converted to a Roth IRA, you would not have to pay taxes on the conversion since your cost basis will be the same as your non-deductible contribution. However, if you had a tax-deductible contribution to your Traditional IRA and converted to a Roth, you would pay taxes as your basis would be zero.
Note that if you want to do a conversation, you need to consider the total balance across all of your Traditional IRA to determine your tax impact, even the IRAs are with different brokerages. If you have a mixture of taxed and untaxed contributions, the taxable amount of your conversation will be proportional to your overall basis relative to your overall balance across all accounts. This means that you can't just say that you want to convert only the non-tax deductible contributions when you are doing this conversation.
Yes but it would be taxes on two different items - Taxes in as paid on your income when you earned it, taxes out on those dollars when/if you made investment gains in the traditional 401(k).
If you planned to add to the traditional then convert quickly to the Roth, you wouldn't have much time to have any capital gains or income anyway.
when it comes to doing conversions or trying to put money in a non deductable traditional with the idea of converting to a roth to get around income limits be aware.
the money in your ira's are all looked as as one big pile of money. if you have deductable ira's , and made a non deductable ira contribution to a traditional with the idea of swinging it over to a roth it can be tricky.
if you have 5k in non deductable ira money and 50k in deducable money then if you try to convert the non deductable money to a roth you cant cherry pick it.
that 5k would actually be prorated and taxed based on all your ira money in traditional iras whether deductable or not.
in the above 5k is 10% of the total of 50k so only 10% of that rollover would be considered a tax free conversion.
when it comes to doing conversions or trying to put money in a non deductable traditional with the idea of converting to a roth to get around income limits be aware.
the money in your ira's are all looked as as one big pile of money. if you have deductable ira's , and made a non deductable ira contribution to a traditional with the idea of swinging it over to a roth it can be tricky.
if you have 5k in non deductable ira money and 50k in deducable money then if you try to convert the non deductable money to a roth you cant cherry pick it.
that 5k would actually be prorated and taxed based on all your ira money in traditional iras whether deductable or not.
in the above 5k is 10% of the total of 50k so only 10% of that rollover would be considered a tax free conversion.
Yep, that was what I wa trying to convey without putting together an explicit example. Generally in these cases, it's best to get oe help from an accountant to help you determine your cost basis.
to be honest accountants are not the right people either. they know the tax end but not the financial planning end.
there are other issues to consider such as keeping equities out of retirement plans where they are taxed at capital gains rates and you can write off losses.
they can pass tax free to heirs with no required distributions like a roth has.
income generating stuff does well in retirement plans since its taxed at regular income anyway
Last edited by mathjak107; 11-04-2012 at 06:36 AM..
to be honest accountants are not the right people either. they know the tax end but not the financial planning end.
there are other issues to consider such as keeping equities out of retirement plans where they are taxed at capital gains rates and you can write off losses.
they can pass tax free to heirs with no required distributions like a roth has.
income generating stuff does well in retirement plans since its taxed at regular income anyway
Good point. I was just referring to the tax implications, not whether it is a good financial decision or not. My accountant works very closely with my financial advisor, so for me, it is covered both from a planning perspective as well as from a tax impact perspective.
This thread got me thinking about the strategy of opening up a non-deductible IRA and immediately converting it to my Roth to avoid the income limits (I don't have a traditional IRA to worry about pro rating).
the article highlights the concept of the "step transaction doctrine" which seems to have been created to address issues like this. It summarizes:
Quote:
In the end, the contribute-and-then-convert strategy is not expressly prohibited by the tax code, but the IRS does have the right to tax a transaction according to its true economic reality. And if the express goal and intent of the client is merely to circumvent the clear intent of the law, and is done in a manner that blatantly disregards it, beware. While the reality is that the likelihood of getting caught is extremely low, when the IRS believes that a transaction is abusive, not only do they act to shut it down, but they don't always provide leniency for those who have already tried to take advantage of it in the past.
Has anyone had any experiences with this? This perpetual backdoor seems a little too good to be true...
This thread got me thinking about the strategy of opening up a non-deductible IRA and immediately converting it to my Roth to avoid the income limits (I don't have a traditional IRA to worry about pro rating).
the article highlights the concept of the "step transaction doctrine" which seems to have been created to address issues like this. It summarizes:
Has anyone had any experiences with this? This perpetual backdoor seems a little too good to be true...
Interesting article. I should ask my accountant about this the next time I talk to him. For us, we have a mixed of pre-tax contributions (mostly from 401(k) rollovers) mixed in with the after-tax contributions, so any conversion for us would trigger a taxable event (we have a conversion program set up by our accountant to smooth out the tax impact to our preferences). I suspect that since we are paying taxes on our conversations, it would obfuscate it enough to avoid drawing the attention of the IRS.
Currently I have no traditional anything. Just a Roth and some individual trading accounts across a few brokerages. I will be just starting a traditional 401k shortly... IDK if my company divides up the start of contributions to align with fiscal quarters or what not. I'm assuming it'll begin in January.
This thread has taken an interesting twist, bringing to light (for myself anyway) this loophole. But it didn't answer my original question.
$125,000 gross income
$17,500 contribution to traditional 401k
In 2013, based on those numbers, can I contribute $5,500 to my Roth IRA?
Currently I have no traditional anything. Just a Roth and some individual trading accounts across a few brokerages. I will be just starting a traditional 401k shortly... IDK if my company divides up the start of contributions to align with fiscal quarters or what not. I'm assuming it'll begin in January.
This thread has taken an interesting twist, bringing to light (for myself anyway) this loophole. But it didn't answer my original question.
$125,000 gross income
$17,500 contribution to traditional 401k
In 2013, based on those numbers, can I contribute $5,500 to my Roth IRA?
I am not an accountant.... but my understanding is the income limits are based on MAGI...so you don't have to add back any of your 401K contributions to your AGI...
Therefore, if you contribute $17.5K to your 401k, you should be under the $110K phase out starting point, and can contribute fully to a Roth....
Happy Thanksgiving to one and all. I thought I might leave this thread with a thought that had just occurred to me. Instead of the blatant transfer of an all cash traditional IRA to a Roth IRA perhaps one might consider this as I think it is more on the up-and-up. (If not chime in please.) Allocate the funds in the traditional Roth to MLP's. There are lots and they are tax advantaged on their own. From there xfer the funds into a Roth after some time. Everyone might be happy with that course of action.
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