Roth IRA Workaround: 2010 Conversion Limit Loophole

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Retirement Nest EggsCan’t contribute to a Roth IRA? There’s a workaround.

I was speaking my accountant a few weeks ago when we began discussing retirement options. One of the ideas we discussed was to contribute to a non-deductible Traditional IRA with the plan of converting it into a Roth IRA in 2010. Prior to 2010, if you earned more than $100,000 MAGI, you cannot convert a Traditional IRA to a Roth IRA. This limit is the same whether you’re married or single (boo!). Starting in 2010, that rule disappears so anyone of any income can convert (more on the 2010 traditional IRA conversion income limit loophole).

Right now, my wife and I cannot contribute to a Roth IRA and so we lose access to one of the greatest retirement vehicles available. Fortunately she has access to a 401(k) and I have access to a SEP-IRA, so we do have pre-tax retirement accounts; we just don’t have post-tax vehicles like the Roth IRA. So how do we get some? Use that loophole!

Here is our strategy to take advantage of the 2010 rule change, we will both contribute to non-deductible Traditional IRAs and then convert them, nearly tax free, to Roth IRAs in 2010. It’s nearly tax free because we would still be responsible for taxes on any appreciation the IRAs saw. In talking with my accountant, this strategy works but he gave me some pointers to ensure we don’t run into any headaches.

  • Separate the Traditional IRAs from any other retirement assets. He advised that we open separate accounts from both each other (this is required, you can’t have a joint IRA) and from any other retirement assets. This will give us the greatest flexibility in the future. If we were to mix our non-deductible Traditional IRA with my SEP-IRA (I took a deduction for those contributions), I can’t decide to convert just the “non-deductible” part of that mix.
  • Remember to file IRS Form 8606. My accountant said that a lot of filers who go the DIY route often fail to submit this form and this can cause big headaches down the road. Form 8606 covers non-deductible IRAs and it’s the only way you can tell the IRS that you contributed to a non-deductible Traditional IRA; they won’t know otherwise. Deductible IRA contributions are recorded as a deduction and the IRS doesn’t care about Roth IRAs.
  • You don’t have to convert all at once. This is more an explanation of the rule than advice on what to do but you don’t have to convert all the assets in one shot. You can spread it across two years. This wouldn’t matter to us for our non-deductible Traditional IRAs but if we opt to convert any of our Rollover IRAs, we could spread the damage across two years.

Now we have to hope that the rule doesn’t change or those non-deductible Traditional IRA dollars will be taxed again… in 40-something years.

Has anyone else looked into this?

(Photo: dawnzy)

{ 17 comments, please add your thoughts now! }

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17 Responses to “Roth IRA Workaround: 2010 Conversion Limit Loophole”

  1. Another strategy to consider (if you have a Health Savings Account) is to use the HSA as a Roth type-investment. If you do not use the HSA funds for current medical expenses, those funds will grow and can be withdrawn in retirement, entirely tax free, as reimbursement of past and present medical expenses, including Medicare premiums. It’s actually better than a Roth IRA because you don’t pay tax going in either.

  2. cmfalken says:

    You may want to doublecheck the rules, but I thought that when you convert, even if you have separate IRAs, you need to allocate a percentage of your conversion as deductible that matches the percentage of ALL of your IRAs that are deductible. Maybe it’s different with a SEP, but as I understand it, if you have a deductible IRA that is $80,000 and a non-deductible IRA that is $20,000, if you want to convert $20,000 to a Roth, $16,000 (80%) needs to be considered deductible. Again, I may be wrong and/or the case may be different with a SEP, but that’s how I remember it.

  3. jim says:

    My accountant told me that putting them in a separate account will be sufficient for that purpose…

  4. cmfalken says:

    Jim, take a look at the article from Nickel:

    Or look at example #3 here:

    I also checked a couple other places, and it looks like you need to allocate deductible and non-deductible on a pro-rata basis.

  5. cmfalken says:

    Jim, I did a bit more research and tried to post a comment with a couple links to articles that showed that you DO need to allocate non-deductible and deductible IRAs (including SEPs) on a pro-rata basis (regardless of whether they are separate accounts), but I think the urls were causing my comments to be blocked. If you google “roth ira conversion 2010”, some of the first few articles do mention this. Just want to make sure you know in case it changes your plans. Thanks.

  6. jim says:

    Hmmm I’ll have to check back with my accountant to see if we had a misunderstanding. I appreciate all the research you did, I’ll let you know what he says.

  7. Nicole says:

    I do not qualify for a roth, so I started contributing to a non-deductible IRA in 2006. I plan to convert to the Roth in 2010. Fortunately, I do not have any traditional IRAs so i do not have to worry about the pro-rata allocations. I did read about that when I was researching this issue a couple of years ago, but I have to admit i don’t completely understand it.

  8. Nicole says:


    Yes, I just wrote an article about this on my blog today. All IRA monies must be converted pro rata unfortunately. It also includes a couple work arounds…not sure how helpful it will be to your situation specifically.

  9. Jim,

    We’ve been using a conversion strategy over the last 10 years to move money every other year. You do need to consider all accounts as one like the others said and treat it pro-rata.

    However, there is a strategy where you can move your deductible IRA money to a 401k if you have one and it allows such a transfer. Leave only the after-tax money, and then convert it.

  10. Jim says:

    Is the pro-rata allocation based on your IRAs ans SEPs, or do you have to include your spouse’s?

    • joe says:


      You do not include your spouses. They are seperate. When you convert a portion of your IRA to a Roth, all of YOUR IRAs are considered for percentage of basis that is excluded from gross income.

      If your spouse converts some of her IRA, same thing.

      One trick is to move all your money into an employer sponsored QRP which will leave only your deductible monies left to convert tax free. The problem is then you cant get the money back out of the QRP until you have a triggering event.

      I am CPA and specialize in this stuff. Accountants normally are not aware of the complexity of these rules. Email me if you have any questions.

  11. Dwight says:


    I have a slightly different situation. I have approx. 20k pre-tax and 20k after-tax in Traditional IRA’s. I also have approx. 200k in after-tax and 200k earnings (pre-tax) in a 401k. The 401k is with Fidelity and they indicate that I can convert the after-tax portion of the 401k to a Roth IRA, and the pre-tax portion to a Tradiional IRA. (They indicated that the pre & after tax portions had to come out together.)

    What I would like to do is to first convert all of my IRA to a Roth (20k gross income) and then convert the 401k. Do you see a problem with the pro-rata rule if I do both of these in the same year? Or can I for example do the 40k IRA conversion, say in Feb. 2010 (20k taxable)and then in March do the 200k Roth, 200k Traditional conversion from my 401k? I’ve asked several sources and haven’t received a satisfactory answer. Thanks.

  12. tb702 says:

    Can I contribute to a non-deductible IRA only for 2009 even though I qualify to make a deductible IRA then do a conversion to Roth. I do not have anything in an IRA, just 401K with my current employer. Gross income for 2009 is about 63k.

    • Steve says:

      You can contribute directly to the Roth since your AGI is low enough. No need to go the conversion route.

  13. Stephen says:

    I am self employed and have a SEP with a value of 800,000. I want to roll it over into a Roth IRA, but can I contribute my 44,000 for 2010 before I convert it.

  14. virginia says:

    pretty limited thinking that a roth is greatest vehicle. read quotes from roth conversion experts who do not even convert much of their own IRA’s to Roth.

  15. Tony says:

    How would you fill out Form 8606 in your example? If you make a non deductable IRA Contribution and convert it to Roth IRA, won’t a 1099-R get issued which would make the entire conribution amount table vs only being taxed on the gain?

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