Am I correct re: my Roth Conversion?

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Saaybogle
Posts: 1
Joined: Tue Jun 30, 2015 8:42 am

Am I correct re: my Roth Conversion?

Post by Saaybogle » Mon Apr 15, 2019 10:26 am

Dear all, please let me know if I am correct in thinking about my planned t-IRA to Roth IRA conversion.

I currently have a t-IRA with Vanguard. I contributed to it this year in January. I should not have because now I no longer can deduct it for tax purposes due to a higher income.

I would like to convert such contribution to my Roth IRA with Vanguard.

I have a 401K at work (low fee index funds).

I was thinking to convert the t-IRA contribution to the Roth IRA now, and then roll the rest of the t-IRA into my workplace plan?

Does my t-IRA only need to be at $0 by the end of the year in order to do the conversion, without incurring tax liabilities because of the pro rata rule applying to the rest of my t-IRA? I don't need to roll-over all of the t-IRA (other than what I plan to convert to the Roth) first, then do the conversion, right?

Thank you.

DSInvestor
Posts: 10981
Joined: Sat Oct 04, 2008 11:42 am

Re: Am I correct re: my Roth Conversion?

Post by DSInvestor » Mon Apr 15, 2019 10:54 am

Keep in mind that the income limits for TIRA deduction and Roth IRA contribution may be different. As such you should check to see if you're eligible for Roth IRA contribution. If eligible for Roth IRA contribution, look into recharacterization of TIRA contribution to a Roth IRA contribution. Recharacterization of your IRA contribution will make it as though you had contribution to Roth IRA all along - any growth since the contribution will be treated as though it happened in the Roth IRA all along.

If your latest 2018 TIRA contribution is non-deductible (IRA basis) and you have other IRA assets in your TIRA from prior years where you were able to take the TIRA deduction, a partial conversion to Roth IRA will force you to prorate your IRA basis and make some of the conversion taxable. If you're eligible for recharacterization of your IRA contribution, you side step is IRA prorata rule since you're not doing a conversion.

From IRS page on IRA deduction limits: https://www.irs.gov/retirement-plans/ir ... ion-limits
Single filer:
2018 TIRA MAGI phase out if covered by employer plan 63-73K. No TIRA deduction allowed if MAGI > 73K.
2018 Roth IRA MAGI phase out - 120K-135K. Full Roth IRA contribution allowed if MAGI < 120K.

If you're not eligible for Roth IRA contribution and need to convert your TIRA to Roth IRA, you should get familiar with form 8606 which handles IRA basis and Roth IRA conversions.
IRS Form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf
Wiki

Alan S.
Posts: 8339
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Am I correct re: my Roth Conversion?

Post by Alan S. » Mon Apr 15, 2019 12:10 pm

If you are NOT eligible for the regular Roth contribution through recharacterization, then you can convert your IRA basis.

However, since there is always a chance that your employer plan will not accept the IRA rollover, you should complete that rollover before converting. If you convert your basis first, and the IRA rollover isn't completed for whatever reason then you are stuck with a mostly taxable conversion. This situation changed last year when it was no longer possible to recharacterize conversions done in 2018 or later.

The 3 most frequent reasons that the IRA to employer plan cannot be completed are:
1) Employer plan does not accept IRA rollovers
2) Plan does accept them, but ONLY from rollover IRA accounts.
3) Employee waits too long and the process is not completed by year end.

And sometimes the employee messes up after completing the rollover by rolling a different employer plan into an IRA in the same year.

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