In 2010, the income rules for Traditional IRA to Roth IRA conversions will be lifted. It’s known as the 2010 Traditional IRA conversion loophole and it will let anyone get themselves a Roth IRA if they are patient and willing.
The current rule states that anyone with income greater than $100,000 cannot convert a Traditional IRA into a Roth IRA. Also, the current Roth IRA income phaseout limits run from $101,000 to $116,000. That means someone with an income of $100,000 or more essentially cannot take full advantage of the Roth IRA.
The solution is for you to take advantage of the loophole by contribution to a Traditional IRA. To take advantage of this, it’s very important for you to open a Traditional IRA that is not part of any existing IRA. When you do this, you will contribute to the Traditional IRA, no deduct the contribution from your taxes when you file, and then do the conversion in 2010 when the loophole presents itself.
It is important that you keep the paperwork very clear, which is facilitated by opening this special account, otherwise you run into some problems later. For example, if you contribute to another Traditional IRA that you have deducted from, you can’t elect to convert the portion that was nondeductible. You have to take it in percentages from each bucket, which can be a headache.
So, if you are going to be taking advantage of the loophole, be sure to open a separate account to keep things nice and clean.
2 responses to “Contribution to Non-Deductible Traditional IRA”
I have a question — I have a traditional IRA which is separate from the rollover IRA. The rollover IRA is funded by rolled over 401k at ex-employers. The traditional IRA is all non-deductible contributions.
Does this mean I can convert part of this traditional IRA to ROTH in 2010? Is there a way to indicate which year’s contribution I am rolling over?
To convert, you specify a dollar amount or percentage of the Traditional IRA you want to convert. You can’t pick from which year it comes from but if it’s all nondeductible contributions in the Traditional IRA then it won’t matter. That’s why it’s important to keep the nondeductible and the deductible (the rollover) completely separate.
So when you make the conversion, you say you want to convert $1000 or 20% or whatever it is; then you pay the taxes on that.