Non deductable IRA conversion to roth | Ed Slott and Company, LLC

Non deductable IRA conversion to roth

I have a client who cannot make Roth contributions due to income. He makes an annual nondeductible contribution and the following tax year we make a Roth conversion on his account. The fund company used has told me it is not necessary to wait until the following year and that they can accept his nondeductible contribution and convert it to his Roth account on the same day. Is this correct? I have been under the belief that there needed to be a longer timeframe before conversion.

They are correct, there is no waiting period required. Of course, if client has any other non Roth IRA balances, those accounts must be included in the conversion tax calculation on Form 8606. Conversion would only be tax free if all client has are non deductible contributions.

When you can convert a Non-Deductible IRA I understand that any other IRA Accts would have to be converted to a Roth as well, does this include accts still labeled as 401ks and 403b's etc?

No, only IRAs including SEP and SIMPLE IRAs. You can convert whenever you wish and any AMOUNT you wish, but the pre tax balance as of 12/31 of the year of conversion must be included in figuring the taxable portion of the conversion on Form 8606. For example, if you make a non deductible contribution of 5k and also have a pre tax IRA balance of 95k, then only 5% of your conversion is non taxable. This is true if you only convert 5k or convert more than 5k.

 

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