Author Topic: Trad IRA contributions & Roth conversion question  (Read 217 times)

barrelomonkeys

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Trad IRA contributions & Roth conversion question
« on: January 11, 2019, 12:58:56 PM »
Hi everyone,

My husband and I unexpectedly had several large windfalls in 2018, so we became ineligible to contribute to our Roths, even though we had already put a couple thousand in each.  We have since called and recharacterized these 2018 Roth contributions as Traditional IRA contributions.  Because of said windfalls, we are now in a position to fill up our traditional IRAs to the 2018 limit.

My question is: if we fill up our Traditional IRAs and then convert them back to Roth, can we claim the $11,000 deduction in income FY 2018 and then count the $11,000 conversion as extra income FY 2019?  Since we will earn quite a bit less in 2019 than we did in 2018, this makes sense, but I don't know if this is how it works.  This part of the tax code (recharacterizations, conversions, etc) is incredibly confusing to me.

Thanks in advance.

terran

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Re: Trad IRA contributions & Roth conversion question
« Reply #1 on: January 11, 2019, 01:13:57 PM »
If you made too much to eligible to make direct Roth IRA contributions then you made too much to deduct traditional IRA contributions.

What you're (probably) doing is what is colloquially called a backdoor Roth contribution whereby you make a non-deductible traditional IRA contribution (in your case recharacterize to a traditional IRA) and then convert to Roth. Since you won't deduct the traditional IRA the conversion is not taxable, except the extent of any gains since contributing which are taxable (since you recharacterized, the gains start when you first contributed to Roth).

The exception to the non-taxability is if you already have any balance in your traditional IRA that you previously deducted. In that case then any conversion you make is considered to come proportionally from the previously deducted balance and the non-deducted balance, so you'll pay tax in that proportion. This is known as the pro-rata rule.

Any taxable amount you convert (either from gains or from the pro-rata rule) will be taxable in the year in which you make the conversion, so 2019 if you convert any time this year.

Nothlit

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Re: Trad IRA contributions & Roth conversion question
« Reply #2 on: January 11, 2019, 01:57:00 PM »
If you made too much to eligible to make direct Roth IRA contributions then you made too much to deduct traditional IRA contributions.

Only if covered by a workplace retirement plan

terran

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Re: Trad IRA contributions & Roth conversion question
« Reply #3 on: January 11, 2019, 02:00:10 PM »
If you made too much to eligible to make direct Roth IRA contributions then you made too much to deduct traditional IRA contributions.

Only if covered by a workplace retirement plan

Right, good point.

barrelomonkeys

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Re: Trad IRA contributions & Roth conversion question
« Reply #4 on: January 12, 2019, 07:35:52 AM »
Hey, thanks for the input, guys.  Yes, I failed to mention that we didn't have any access to workplace retirement plans in 2018, so we will be able to deduct.  Thanks for catching that, Nothlit.

So if I understand this correctly, all of the contributions and gains will be taxed as ordinary income in 2019?

It just seems so strange to recharacterize, blow it up, and convert it right back. 



MDM

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Re: Trad IRA contributions & Roth conversion question
« Reply #5 on: January 12, 2019, 02:05:59 PM »
So if I understand this correctly, all of the contributions and gains will be taxed as ordinary income in 2019?
Yes, if you take a deduction for a 2018 tIRA contribution and then convert to Roth in 2019.

Conversions are always subject to tax for the calendar year in which they are done.  Contributions and recharacterizations may apply to either the current or previous year, if done prior to the previous year's filing deadline.

carolina822

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Re: Trad IRA contributions & Roth conversion question
« Reply #6 on: January 12, 2019, 03:50:11 PM »
You can make non-deductible contributions to a traditional IRA but since it sounds like your tax rate will be lower in 2019 it probably makes more sense to pay the tax upon conversion in 2019.