Comments on: Roth IRA Workaround: 2010 Conversion Limit Loophole

By: Jim

Jim — Tue, 12 May 2009 16:21:12 +0000

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

By: My Dollar Plan

My Dollar Plan — Wed, 10 Sep 2008 02:21:09 +0000

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.

By: Nicole

Nicole — Tue, 09 Sep 2008 19:48:37 +0000

Jim-

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.

http://daseducation.wordpress.com/2008/09/09/when-converting-a-traditional-ira-to-a-roth-ira-in-2010-beware-of-the-glitches/

By: Nicole

Nicole — Fri, 05 Sep 2008 16:11:30 +0000

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.

By: jim

jim — Wed, 03 Sep 2008 19:28:06 +0000

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.

By: cmfalken

cmfalken — Wed, 03 Sep 2008 18:51:36 +0000

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.

By: cmfalken

cmfalken — Wed, 03 Sep 2008 18:42:34 +0000

Jim, take a look at the article from Nickel: http://www.fivecentnickel.com/2007/10/18/look-before-you-leap-roth-ira-conversions-in-2010/

Or look at example #3 here: http://www.money-zine.com/Financial-Planning/Retirement/2010-Roth-IRA-Conversions/

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

By: jim

jim — Wed, 03 Sep 2008 18:04:41 +0000

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

By: cmfalken

cmfalken — Wed, 03 Sep 2008 16:50:49 +0000

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.

By: Mr. ToughMoneyLove

Mr. ToughMoneyLove — Wed, 03 Sep 2008 16:29:16 +0000

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.