Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Queston about Roth Contribution Loophole for High Income
Posted by: a1324823, December 19, 2011 06:58PM
Hi,

I currently have an income that prevents me from making a Roth IRA contribution and have maxed out at my employers 401K plan. I understand that I could make a non-deductible contribution to a Traditional IRA and then immediately convert it over into a Roth IRA (I have an established Roth IRA from previous years when I was eligible), effectively making a Roth contribution possible for this year.

I know that I would have to file an IRS form 8606 with my return, but presumably (since I would leave the initial Traditional IRA contribution in cash for only a few days), there would be no tax liability incurred from this transaction.

HOWEVER, I have a separate Rollover IRA (from a previous employer's 401K), all of which is pre-tax.

Would the basis and amount of my Rollover IRA make my Traditional to Roth Ira conversion subject to taxation? It seems that my "new" Traditional IRA would have been sufficiently segregated as non-deductible to avoid any questions about the taxable and non-taxable portions.

Any advice would be greatly appreciated!

Re: Queston about Roth Contribution Loophole for High Income
Posted by: Alan S., December 19, 2011 08:13PM
Yes, your rollover IRA would make the conversion mostly taxable, as Form 8606 generates the taxable percentage including all your TIRA, SEP or SIMPLE IRAs.

There is a way around this if you can roll the pre tax balance of your TIRAs into your employer plan leaving only the non deductible contribution amount in your TIRA. The conversion would then be tax free because there is no pre tax balance left to pro rate.

But if your employer plan has high costs or you would need access to those funds prior to leaving the company, it may not be worth it to make that move.

You can still make the contribution and not convert if you just want to take advantage of the chance to get more funds into your TIRA where they can grow tax deferred....or if you do not mind paying the taxes on the conversion.

Another way to get money into a Roth if your employer plan has a Roth option is to elect for part of your deferrals to go to the Roth account. There is no income limit to do that, but of course you do not get a deduction for designated Roth contributions.

Re: Queston about Roth Contribution Loophole for High Income
Posted by: a1324823, December 19, 2011 10:12PM
Thank you Alan for your advice on this. My wife actually was able to do the same with her rollover IRA, but for a variety or reasons, it won't work for me with my employer.

One last question though: On Form 8606 it mentions all TIRA, SEP, or SIMPLE IRAs have to be added. Is a Rollover IRA in one of those three categories? I thought that when Rollover IRAs were created, they were their own category (specifically so they could be later moved back into a qualified plan). So when I first read the 8606 I thought that the Rollover IRA was not included on that line (just like 401K's are not included).

I do have a sideline business, could I create a Keogh and move the funds from the Rollover IRA into the Keogh to accomplish exactly what you described?

Re: Queston about Roth Contribution Loophole for High Income
Posted by: Art, December 19, 2011 10:29PM
A rollover IRA is a Traditional IRA (TIRA)

You're right that once upon a time a rollover IRA was called a Conduit IRA but that designation and restriction no longer applies.

Re: Queston about Roth Contribution Loophole for High Income
Posted by: a1324823, December 19, 2011 10:46PM
Thanks! So does this mean that I could create a Self-Employed 401K and then move my Rollover IRA into it and then accomplish my original goal of making a new TIRA (with non-deductible contributions of $5000) and then converting it into my Roth IRA to allow me to effectively make a Roth IRA contribution for this year?

Re: Queston about Roth Contribution Loophole for High Income
Posted by: Alan S., December 19, 2011 11:53PM
Yes, that would work IF it is otherwise worth it for you and to pay the costs that vary by provider. The plan would have to include provisions to accept IRA rollovers.

There is no particular rush to complete this by year end if your main purpose is just to get the rollover done. You can set it up in 2012 and as long as the rollover is done by the end of 2012, you could make the non deductible TIRA contributions for both 2011 and 2012 and convert them tax free.

Just remember that you need to use the Solo K plan for its main purpose as well, just not use it solely to hold the rollover.

Re: Queston about Roth Contribution Loophole for High Income
Posted by: a1324823, December 20, 2011 03:33AM
Thanks again for the advice!

I am curious Alan, what do you mean when you said that "you need to use the Solo K plan for its main purpose as well, just not use it solely to hold the rollover"?

Are you saying that I have to fund it each year from my profits or it would somehow become non-qualified? I was looking at the Fidelity product and it appears not to have any more expenses than a standard brokerage account or IRA. It would seem to be a safer place to keep the assets too since qualified plans provide more asset protection than non-qualified ones.

Also thanks for the tip about the year end deadline. I didn't think about that and it might make things much simpler for me.

Thanks again in advance!

Re: Queston about Roth Contribution Loophole for High Income
Posted by: RichC, December 21, 2011 08:45PM
It would seem to be a safer place to keep the assets too since qualified plans provide more asset protection than non-qualified ones.

I recall (perhaps from Alan S. himself!) that solo 401(k) plans, though QRPs under the IRC, do not have nearly as generous asset protection features as "normal" QRPs.

Re: Queston about Roth Contribution Loophole for High Income
Posted by: Alan S., December 22, 2011 12:20AM
Correct.

A solo K is fully protected in bankruptcy, but NOT outside of bankruptcy. See the following:

[www.irafinancialgroup.com]



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