IRA Rules for 2011

Not really. The warning I'd give you is this: If you have any existing pretax IRA money, the new conversion is prorated to calculate the tax due. If no pretax IRA, this is a great way to Texas two step to the Roth.

e.g. your existing IRA is all pretax and now worth $15K. You deposit $5K and immediately convert. 3/4 of it is pretax money ($3750) and taxed. This is why there's the need to first deposit to the IRA.

I'm not such a fan of Roth IRA's but I'm trying to understand the concept you just described.

I thought that when you Roth-convert $5K, that $5K is then taxable (either in the year of conversion, or if a special provision is in force, spread out over possibly several tax years).

Why would only $3750 be taxable?

Steve

Roth conversions are only taxable to the extent then contain pre-tax money. If one isn't able to deduct their IRA deposit, they track the post-tax component. In my example for OP, the IRA had $20K, $5K post tax. Therefore, on conversion, 3/4 taxable.

For those who couldn't deduct any deposits Roth conversion may result in very little tax, as the cumulative post tax deposits are probably the major portion of present value especially with the market moving sideways these past ten years.

If you have no IRA at all, but a high income, you can deposit and convert right to Roth with no tax due at all.

Steve, I'm not a 'fan' per se, in fact a google of 'RothMania' turns up an article and comments I've made that it's over done. But, they have their place. (a) for those above the pre-tax IRA limit, (b) conversion for those in a very low income year compared to normal, (c) for those already retired to "top off" their 15% bracket avoiding the growing RMDs that may push them into 25%.

/Joe

One still gets to allocate any non-taxed basis to the conversion. Therefore, only pre-tax contributions (plus earnings, but as this is uninvested cash, they are zero in this case) are taxed.