Would you like to fund a Roth IRA regardless of your income or whether you are covered by your employer’s retirement plan?
You want to contribute to an IRA for your retirement. You wish to do so in a very efficient manner for tax planning. You have done your research and find that contributing to a Roth IRA is the way to go for a multitude of reasons. Your enthusiasm begins to wane after you call your tax advisor and are told that you are ineligible to make a contribution to a Roth IRA because you exceed the income limitations to contribute to a Roth. In other words, you make too much money. You then ask your tax advisor if you could make a tax deductible contribution to a traditional IRA. You are further disappointed to learn that because of the amount of money you earn or because of the contributions made to your employer’s retirement plan, you are ineligible to make a tax deductible contribution to a traditional IRA. Your tax advisor tells you that you are eligible to make a contribution to a traditional IRA. While it is explained to you that the earnings of the traditional IRA grow tax deferred, other aspects of a traditional IRA such as required minimum distributions when you are age 70.5 do not appeal to you.
There is another alternative available to you. You can contribute to a traditional IRA and then call your IRA trustee the next day and request that your traditional IRA be redesignated (converted) to a Roth IRA. Is this allowable? Beginning in 2010, the $100,000 modified AGI limit and filing status requirement on rollovers from eligible retirement plans to Roth IRAs were eliminated. Can this conversion be done tax-free? If this is the only traditional IRA that you have, yes, it can be done tax-free because the only portion of the conversion that would be taxable is the earnings on the traditional IRA. If you make the conversion immediately, the likelihood that the IRA would have earnings is limited. For those taxpayers who previously never made a traditional IRA contribution, they could do this conversion every year with little or no income tax consequences. What if you made traditional IRA contributions in prior years? In those situations, IRS Form 8606 explains that the taxpayer must compute a ratio of (1) the current year’s non-deductible IRA contribution to the (2) total value of all traditional IRAs to compute the portion of IRA earnings to report as taxable income. While this makes the computation of the taxable amount to report more complicated, it nevertheless may meet the taxpayer’s retirement objectives.