My Wife's IRA and roth conversion

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jlg
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Joined: Fri Apr 22, 2011 7:45 am

My Wife's IRA and roth conversion

Post by jlg »

Hi everyone,

My wife (32, me 33, in the 33% federal tax bracket, MA state taxes) opened a Traditional IRA in 2010 (actually, we both did.) She has contributed $10,000 (2010 and 2011 max.) The value of the account is now ~$9600. We opened the tIRA accounts because our income limits were too high for Roth and we didn't understand how the Roth Conversion worked. I guess maybe we still don't, which is why I have this question ...

- Since the account is "in the red", should I perform a Roth conversion now to avoid having to pay any taxes on gains?

This is the only IRA account in her name. She also has an active 401k and is joint owner of our taxable investments. I have a tIRA which contains significant gains and a roll-over, so I do not want to convert this account.

Are there any issues I'm missing? This is all through Vanguard - where I understand that conversions are quite easy. Presumably, if we do this, I can make a backdoor roth contribution in 2012 for her also. This, however, may have tax implications limited to any gains before making the conversion.

Thanks.
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House Blend
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Re: My Wife's IRA and roth conversion

Post by House Blend »

I would just do the conversion, and get it over with. No taxes due. That's what you want.

$400 in "wasted" cost basis is not enough to get excited about IMO.

Next year, do the $5K conversion in her IRA right away, so that you have minimal or no gains.
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retiredjg
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Re: My Wife's IRA and roth conversion

Post by retiredjg »

It depends on whether the $10k in contributions was deductible or non-deductible. I'm guessing the contributions were non-deductible if you were in the 33% bracket.

It would be nice if you could convert on a day when the account is almost exactly $10k just to get the paperwork nice and clean and out of the way.

If you convert now, I agree the $400 in wasted cost basis is not worth worrying about - but it still has to be tracked on her IRS form 8606. Well, I guess realistically, you'll always have to have your last Form 8606 whether it has a zero balance or not - so maybe it does not matter.

You did file a Form 8606 for the non-deductible IRA contributions, right?
kaneohe
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Re: My Wife's IRA and roth conversion

Post by kaneohe »

If you can keep the TIRA open w/ a small balance w/o getting dinged w/ fees, you should be able
to preserve that basis for the future (and convert the rest w/o being taxed if it was non-deductible contribution). It would compensate for any future gains in that account if make further contributons.
Last edited by kaneohe on Wed Nov 09, 2011 2:03 pm, edited 1 time in total.
Topic Author
jlg
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Joined: Fri Apr 22, 2011 7:45 am

Re: My Wife's IRA and roth conversion

Post by jlg »

Thank you for the replies. Yes, cost-basis is something I should have been considering as part of this conversion.

I did in fact file a Form 8606 for the non-deductible IRA contributions (totaling $10,000.)

With today's down market, I may have some more time to think about this. Thanks!
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retiredjg
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Re: My Wife's IRA and roth conversion

Post by retiredjg »

jlg wrote:With today's down market, I may have some more time to think about this. Thanks!
Even if you convert with a gain, you'll only be paying taxes on just a little bit. I wouldn't worry about having a small gain myself. Then, she will have a clear runway for back door Roth IRAs (until/if the law changes).
Alan S.
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Re: My Wife's IRA and roth conversion

Post by Alan S. »

The IRS has never issued guidance on what happens to basis when your TIRA balance goes to -0-, unless you use the lost basis as a misc itemized deduction subject to the 2% floor. Many people cannot itemize, the 2% erases the deduction, or the AMT disallows it. Therefore, if you cannot use the deduction in a given year, kaneohe made a good suggestion.

If you retain a small balance in the TIRA, your remaining 8606 basis will definitely continue. You also keep the account open to receive future IRA contributions, but DO check out the fee question. In some future year, you may be able to apply the misc deduction if it is still practical to close all your TIRA accounts. If you close your accounts, the IRS has not stated how long they need to be closed, but I would think you should keep the balance at -0- until the calendar year you take the deduction is over.

One decision that is probably not worth dwelling over is whether to convert when you discover that your basis exceeds your TIRA balance or wait until the account earnings absorb the basis. Naturally, it is better to convert before earnings losses diminish the value, but sometimes this does not get done. The most important thing is not to forfeit basis that could be applied in the future
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retiredjg
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Re: My Wife's IRA and roth conversion

Post by retiredjg »

So Alan, are you saying:
  • 1) If the IRA goes to zero, you lose the basis ($400 in this example) if you can't/don't take it as an ordinary deduction or

    2) Nobody knows because the IRS has not issued guidance? (Therefore, the suggestion to leave a little in the IRA.)
Alan S.
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Re: My Wife's IRA and roth conversion

Post by Alan S. »

#2.

Perhaps the IRS has provided a clue by the Regs involving the transfer of a Roth 401k to a Roth IRA. In that situation the plan is required to show the employee's contribution amount on the 1099R and that contribution amount becomes Roth IRA basis when it exceeds the cash value of the transfer. While that is a transfer between two different type of Roth accounts under the tax code, it does suggest that the basis is not forfeited, but transferred to the other type of account.

While I would recommend that a taxpayer who closes his TIRAs without taking the misc deduction should consider that his remaining basis lives on through the future life of his TIRA, and suspect that the IRS would not disallow that, there is no clarity in the tax code or Regs to that effect. Accordingly, if you keep a min amount in the account it will eliminate the need to know the definite answer.
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retiredjg
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Re: My Wife's IRA and roth conversion

Post by retiredjg »

Thanks, Alan.
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