Does the following situation make sense or am I missing something? For taxpayers who do not qualify for Roth IRA contributions due to being over the income limit - can they open a regular non-deductible IRA and immediately convert it to a Roth IRA?
Yes, they can. But if they have existing IRAs (including rollover IRAs) the conversion will be almost entirely taxable.
To wit:
Person has $100,000 of trad IRA monies (doesn't matter how they are allocated amongst trad IRA accounts) and hasn't previously made a non-deductible trad IRA contribution.
Now they make a $5,000 non-ded trad-IRA contribution and follow that with a $5,000 conversion.
Right before the conversion, total amount of non-ded trad contributins was $5,000. Total value of all trad IRAs was $105,000. The ratio is $5,000/$105,000 = 0.0476
Therefore the NON-taxable part of the conversion is 0.0476 x $5,000 = $238 and the taxable part of the conversion obviously is $4,762
It DOES NOT MATTER if/that the conversion was done from an account that the non-ded contribution was made to.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
If the only other IRAs that they have are Roth, can I presume that what I suggested will work and that there will not be any tax implications other than a day or two of earnings.
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