Should i try to convert my taxable investment account to Roth IRA

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danny9s
Posts: 4
Joined: Mon Jun 11, 2018 9:52 am

Should i try to convert my taxable investment account to Roth IRA

Post by danny9s » Wed Jun 13, 2018 12:44 pm

I opened a regular taxable brokerage account in Dec 2015 that now contains around 21k. My question is should i make this into a non deductible IRA and then convert to ROTH. I am currently over the income limits to open the ROTH. I fund this account with 500 per month. Is this possible to do and should i do this. If it is possible do i then have to do this every year. If i left anything out please let me know. Thanks for helping.

DSInvestor
Posts: 10792
Joined: Sat Oct 04, 2008 11:42 am

Re: Should i try to convert my taxable investment account to Roth IRA

Post by DSInvestor » Wed Jun 13, 2018 12:48 pm

You cannot convert assets in taxable to Roth IRA. You can sell assets in taxable (capital gains tax event) and use the cash proceeds to contribute to IRA. If your income is too high to contribute directly to Roth IRA, you could contribute $5500/yr (assuming age < 50) and then convert to Roth IRA. This is called the backdoor into Roth IRA. If doing this, I would contribute $5500 in one shot and then convert ALL of it to Roth IRA once the contribution transaction clears.

If you're married, you and your spouse each have $5500/yr of IRA contribution room.

The IRA contribution of $5500 may be deductible or non-deductible depending on whether you and/or your spouse are covered by an employer plan. If neither of you are covered by an employer plan like a 401k/403b/457b/pension etc, your TIRA contributions can be deductible no matter how high your income. If you or your spouse are covered by an employer plan, your high income may make you ineligible to take the TIRA deduction. In this case, you and your spouse must take care to document your non-deductible TIRA contributions using form 8606 as this will help you avoid double taxation on the Roth conversion step.

For details on IRA deduction limits, see this IRS page:
https://www.irs.gov/retirement-plans/ir ... ion-limits

Form 8606:
https://www.irs.gov/pub/irs-pdf/f8606.pdf

Make sure you tell your tax preparer or tax software that you 1) made Traditional IRA contributions and 2) Roth conversion. The tax software will determine whether your TIRA contributions were deductible or non-deductible and put the non-deductible amount into form 8606. At the end of the year, you will get a 1099-R from your IRA custodian to handle the Roth conversion. Lots of folks make the mistake of only entering the 1099-R into the tax return without entering TIRA contribution which results in taxable conversion.
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