Backdoor Roth IRA on 31st Dec?

[bandoba]

Hello Friends,

We live in CA and have high income making us ineligible for Roth IRA. But while discussing this topic tonight, I learnt about backdoor Roth IRA conversion. I personally can't do it unless I get rid of my rollover IRA (or pay the taxes) but this could be an option for my spouse since she only has 401K as of now and never had any IRA account. Now I know it sounds too desperate but let me ask. Would it be possible to open traditional IRA by moving 5K from checking and immediately convert it to Roth IRA as a first thing tomorrow (** 31st Dec 2012 **) morning? Based on reading it seems doable but I'm wondering if it is just too risky and/or not worthwhile?

TIA!

[bandoba]

As per another thread on same topic here (viewtopic.php?f=1&t=107859) its a misconception that one has to open traditional (or Roth IRA) by 31st Dec. So looks like I have more time in hand and no need to rush!

[Raymond]

I've been in the same situation as you (wife with no traditional IRA, we don't qualify for a Roth IRA).

We back door the Roth every year, but if I recall correctly, it takes a day or two for the funds to be credited to the traditional IRA before we can convert it to the Roth.

You actually don't have to hurry, I believe you can still convert to the Roth by April 15th of next year.

[bandoba]

I've been in the same situation as you (wife with no traditional IRA, we don't qualify for a Roth IRA).

We back door the Roth every year, but if I recall correctly, it takes a day or two for the funds to be credited to the traditional IRA before we can convert it to the Roth.

You actually don't have to hurry, I believe you can still convert to the Roth by April 15th of next year.

Thanks Raymond! That's what I am planning to do.

[bUU]

You actually don't have to hurry, I believe you can still convert to the Roth by April 15th of next year.

I'm sorry I'm still trying to wrap my head around some of this... Why is there any deadline for converting to Roth? The contributions to the tIRA need to be made by April 15, to be considered prior-tax-year IRA contributions, but I am under the impression that you can convert the tIRA anytime after that. The sooner the better, yes, but I don't recall any kind of deadline.

[Bob's not my name]

The only deadline is the dead line. Your heirs can't convert an inherited IRA, so convert before you're dead. If you miss this deadline, please come back and post on bogleheads for further advice.

[mhc]

You actually don't have to hurry, I believe you can still convert to the Roth by April 15th of next year.

I'm sorry I'm still trying to wrap my head around some of this... Why is there any deadline for converting to Roth? The contributions to the tIRA need to be made by April 15, to be considered prior-tax-year IRA contributions, but I am under the impression that you can convert the tIRA anytime after that. The sooner the better, yes, but I don't recall any kind of deadline.

There is no deadline on the conversion to a Roth.

[Default User BR]

I'm sorry I'm still trying to wrap my head around some of this... Why is there any deadline for converting to Roth? The contributions to the tIRA need to be made by April 15, to be considered prior-tax-year IRA contributions, but I am under the impression that you can convert the tIRA anytime after that. The sooner the better, yes, but I don't recall any kind of deadline.

Correct. All that is affected is the year in which conversion takes place and that is calendar year so tax day is not a factor. There's a different deadline for recharacterization of a conversion (as I know too well).


Brian

[natureexplorer]

Since you have until April 15, 2013 to make the non-deductible IRA contribution for 2012. You could make the 2012 and 2013 IRA contribution on the same day and then convert it to a Roth IRA in one transaction. You could then wait two years before making another two Backdoor Roth IRA contributions in one go.

[DSInvestor]

I'm sorry I'm still trying to wrap my head around some of this... Why is there any deadline for converting to Roth? The contributions to the tIRA need to be made by April 15, to be considered prior-tax-year IRA contributions, but I am under the impression that you can convert the tIRA anytime after that. The sooner the better, yes, but I don't recall any kind of deadline.

Roth conversions done in calendar 2012 are handled by the 2012 tax return.
Conversions done in calendar 2013 are handled by the 2013 tax return.

Scenario 1: 2012 Traditional IRA contribution on Dec 1, 2012 followed by Roth conversion on Dec 3, 2012.
2012 Tax return and 2012 Form 8606 will handle the IRA contribution and the conversion.

Scenario 2: 2012 Traditional IRA contribution on April 15, 2013 followed by Roth conversion on April 16, 2013.
2012 Tax return and 2012 Form 8606 will handle the IRA contribution.
2013 Tax return and 2013 Form 8606 will handle the Roth conversion because it happened in calendar 2013.

Some folks have made IRA contributions for years but could not convert them until the rules changed in 2010 to allow folks with MAGI over 100K to convert to Roth IRA. Once the income limit was removed for Roth conversion, it opened the backdoor into Roth IRA.

[bUU]

You're talking recording of the event, not about tax impact.

[DSInvestor]

You're talking recording of the event, not about tax impact.

There could be a tax impact as well.
For Roth IRA conversions done in 2010, there was a special provision for Roth IRA conversions where the taxpayer could elect to take the all conversion income in tax year 2010 or split 50/50 across 2011 and 2012. If a taxpayer elected to split the 2010 conversion income into 2011 and 2012, Roth conversions done in 2012 may have an even higher tax cost. That was a one time deal. For 2011 and later, all Roth IRA conversion income must be taken as income for that year.

If there is a conversion of non-deductible IRA assets in any year, the tax payer should be very careful about adding pretax assets into Traditional-IRA ,SEP-IRA, SIMPLE-IRA and Rollover IRAs as this could trigger the IRA prorata calculation and make the conversion taxable. Form 8606 prorates IRA basis based on values of IRA accounts on Dec 31.

[bUU]

Okay I keep figuring that anyone doing a Roth conversion is "naturally" going to sweep pretax assets into current-employer 401(k). That's not always the case.