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Converting Traditional IRA to Roth No Taxes

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Acey
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Converting Traditional IRA to Roth No Taxes  Reply with quote  

I historically contributed to a Roth, then hit the income limits and stopped for a few years. Then, I learned that I could contributed post-tax dollars to a traditional and convert to a Roth. So, I did that. I had never had a traditional IRA before doing this (all dollars in 401k or my Roth). Based on my understanding, that meant I didn't have any taxes on conversion because I didn't have any other IRA funds to muck up my completely post-tax conversion.

Was I right? I was going to go ahead and do this now for 2013 (my second time) with my previously converted (and now $0) traditional into my Roth. Thought I might double-check first!

Thanks for any insight and sorry if this scenario has been posted and I missed it.
Post Sun Jan 20, 2013 5:44 pm
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coaster
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I think that as a general rule of thumb when a situation gets so screwed up that it's difficult to understand what happened, when and why, that instead of trying to fix the situation by applying yet another change to it, the best advice is to just forget it, leave it alone, and start over with a new plan. To apply that here: do nothing with this account; open a new account of the type you wish to proceed with in the future and begin from zero in that new account.

~Tim~
Post Sun Jan 20, 2013 6:40 pm
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Acey
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Well, I don't think it's screwed up. I did exactly what I meant to do Smile

I just thought I'd check in on my understanding of the rules.
Post Sun Jan 20, 2013 6:55 pm
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clydewolf
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Re: Converting Traditional IRA to Roth No Taxes  Reply with quote  

quote:
Originally posted by Acey
I historically contributed to a Roth, then hit the income limits and stopped for a few years. Then, I learned that I could contributed post-tax dollars to a traditional and convert to a Roth. So, I did that. I had never had a traditional IRA before doing this (all dollars in 401k or my Roth). Based on my understanding, that meant I didn't have any taxes on conversion because I didn't have any other IRA funds to muck up my completely post-tax conversion.

Was I right? I was going to go ahead and do this now for 2013 (my second time) with my previously converted (and now $0) traditional into my Roth. Thought I might double-check first!

Thanks for any insight and sorry if this scenario has been posted and I missed it.

As I understand, you do not have a Traditional IRA (TIRA).
You do have a ROTH IRA.
Your income is too high to make a contribution to your ROTH IRA.

You make an after tax contribution to your first ever TIRA.
Then immediately convert the TIRA to a ROTH IRA, depositing the conversion into your existing ROTH account. Or you could put the conversion into another ROTH account too.

There would be no income tax on such a conversion.
This is often referred to as a "Back Door ROTH IRA Contribution".

If your TIRA had some tax deferred money, then your conversion would be part after tax, your recent after tax contribution, and part tax deferred monies.
The ratio of these two types of money in the conversion would be the same as the two types of money in the TIRA. Income tax would need to be paid on the tax deferred amount being converted.
Post Sun Jan 20, 2013 7:16 pm
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Acey
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Re: Converting Traditional IRA to Roth No Taxes  Reply with quote  

[/quote]
As I understand, you do not have a Traditional IRA (TIRA).
You do have a ROTH IRA.
Your income is too high to make a contribution to your ROTH IRA.

You make an after tax contribution to your first ever TIRA.
Then immediately convert the TIRA to a ROTH IRA, depositing the conversion into your existing ROTH account. Or you could put the conversion into another ROTH account too.

There would be no income tax on such a conversion.
This is often referred to as a "Back Door ROTH IRA Contribution".

If your TIRA had some tax deferred money, then your conversion would be part after tax, your recent after tax contribution, and part tax deferred monies.
The ratio of these two types of money in the conversion would be the same as the two types of money in the TIRA. Income tax would need to be paid on the tax deferred amount being converted.[/quote]

Exactly right. I'm assuming I can just keep doing this until they close that "loophole".
Post Sun Jan 20, 2013 7:49 pm
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clydewolf
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Re: Converting Traditional IRA to Roth No Taxes  Reply with quote  

quote:
Originally posted by Acey


As I understand, you do not have a Traditional IRA (TIRA).
You do have a ROTH IRA.
Your income is too high to make a contribution to your ROTH IRA.

You make an after tax contribution to your first ever TIRA.
Then immediately convert the TIRA to a ROTH IRA, depositing the conversion into your existing ROTH account. Or you could put the conversion into another ROTH account too.

There would be no income tax on such a conversion.
This is often referred to as a "Back Door ROTH IRA Contribution".

If your TIRA had some tax deferred money, then your conversion would be part after tax, your recent after tax contribution, and part tax deferred monies.
The ratio of these two types of money in the conversion would be the same as the two types of money in the TIRA. Income tax would need to be paid on the tax deferred amount being converted.[/quote]

Exactly right. I'm assuming I can just keep doing this until they close that "loophole".[/quote]

I don't see this as a "loophole", but an opening.
The fix would be to eliminate the income test for a regular contribution to a ROTH IRA.
Post Sun Jan 20, 2013 8:55 pm
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coaster
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quote:
Originally posted by Acey
Well, I don't think it's screwed up. I did exactly what I meant to do Smile

I just thought I'd check in on my understanding of the rules.


OK, I was reading too much into your description of the scenario, and going by that rather than by doing the research. My error, and my apology.

One caveat, though, getting interpretations of complex tax rules by posting on forums is a chancy business. You know what they say about free advice ...

... though if I may make a shameless plug, our current active members opinions are worth a whole lot more than that ... Wink

~Tim~
Post Mon Jan 21, 2013 6:50 am
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PasadenaFinancialPlanner
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I agree that seeking tax advice on a financial forum can be dicey. If you are trying to self-manage your taxes without a tax professional, one of the best approaches is to download and read IRS publications carefully. For these matters, start with IRS Publication 590 "Individual Retirement Arrangements (IRA)" to answer your own questions. If you cannot find text in IRS documents the clearly describe the rules for what you are doing, then you probably should keep doing more research. On the IRA website, there are also FAQs that answer many of common questions.

In what you wrote, your sentence "Based on my understanding, that meant I didn't have any taxes on conversion because I didn't have any other IRA funds to muck up my completely post-tax conversion." I do not understand what this means. Conversions of traditional IRA assets above any tax basis there might be would be subject to taxation.

However, there are situations where one does not actually pay tax. An example, is when someone has significant tax deductions that normally reduce earned income subject to taxation. If one has a job loss, income can be temporarily (one hopes) reduced, but the deductions are still there, because you still pay mortgage interest, real estates taxes, etc. In this situation, one might be able to convert some amount of traditional retirement assets into Roth retirement assets and not have to pay taxes, because you have deductions that would otherwise go unused.

This clearly is a corner case. Usually Roth conversions involve substantial taxation and only a small portion of taxpayers will benefit in the long run. Roth conversions paybacks occur over a lifetime and are subject to significant uncertainties. For most people, Roth contributions and conversions are not as beneficial as traditional retirement accounts, if there are current taxes to be paid.
Post Tue Jan 22, 2013 10:20 pm
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felisterjack
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Retirement Planning RSS Feed Top Authors in Retirement Planning ... In the arsenal of retirement planning tools, annuities are among the most expensive
Post Wed Jan 23, 2013 7:57 am
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Acey
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All advice noted Smile

I've read quite a lot, but thought a double-check in order. I am very confident it's OK as there is NO pre-tax money involved at all. Regardless, expert advice may be in order.

Thans.
Post Sun Jan 27, 2013 3:36 am
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