Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
medelste
Posts: 13
Joined: Tue Jan 03, 2012 3:36 pm

Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by medelste »

Does a Traditional IRA contribution lose its tax deductibility if converted to a ROTH IRA in the same tax year?

Example:
Feb 2017 - Mary has a Traditional IRA balance of $0
June 2017 - Mary contributes $5500 to a Traditional IRA
September 2017 - Mary converts full Traditional IRA balance to a Roth IRA

Come tax preparation time in early 2018, can Mary take the $5500 IRA deduction?
montanagirl
Posts: 1805
Joined: Thu Nov 19, 2009 3:55 pm
Location: Montana

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by montanagirl »

No she can't and if she converted in a future year the contribution would become taxable.

Is this a trick question?
rkhusky
Posts: 17764
Joined: Thu Aug 18, 2011 8:09 pm

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by rkhusky »

montanagirl wrote: Tue Nov 07, 2017 3:20 pm No she can't and if she converted in a future year the contribution would become taxable.
A minor quibble - the amount converted would become taxable, which could be lower or higher than the contribution.

It may actually be possible to deduct the IRA on 1040 line 32, but the conversion would be added in on line 15b, negating the deduction.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by retiredjg »

medelste wrote: Tue Nov 07, 2017 3:13 pm Does a Traditional IRA contribution lose its tax deductibility if converted to a ROTH IRA in the same tax year?

Example:
Feb 2017 - Mary has a Traditional IRA balance of $0
June 2017 - Mary contributes $5500 to a Traditional IRA
September 2017 - Mary converts full Traditional IRA balance to a Roth IRA

Come tax preparation time in early 2018, can Mary take the $5500 IRA deduction?
Depends on how you are looking at it.

What you have described is a deductible contribution (reduces taxable income by $5,500) followed by a taxable conversion (which adds that $5,500 and maybe more back to the taxable income.)

And if that is what you did, you have to report it that way (both steps) on your taxes (deductible contribution followed by a conversion). You'll need Form 8606 to document your Roth conversion.

If the "full Traditional IRA balance" is less than the $5,500 contribution, there is more that needs to be discussed.


Did you actually do a Roth conversion? Or did you have the tIRA "re-characterized"? These are not the same thing.
Topic Author
medelste
Posts: 13
Joined: Tue Jan 03, 2012 3:36 pm

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by medelste »

Thanks, everyone!

I haven't done anything yet this year. I was just considering the options for end-of-year tax minimization. I thought it was "too good to be true" that the IRA contribution would still be deductible even if converted to a Roth in the same year, but I wanted to double check with you in order to be sure.

Thanks again
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by retiredjg »

But you do realize there is no point in doing that, right? You achieve the same thing by contributing directly to Roth IRA...with less paperwork and more flexibility about withdrawing the money if needed.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by celia »

If you are eligible to make a deductible IRA contribution, you can make it and deduct it on your taxes. But the amount you convert will be taxed (the next day or years later). If they are done in the same year, it is sort of "a wash".

If you make a non-deductible traditional contributions, you pay taxes on the contribution. But when you convert it, the conversion is tax-free (although the growth, if any, is taxed). If they are done in the same year, it is sort of "a wash".

The important thing to know is that you only pay taxes on those dollars once, either at contribution time, conversion time, or withdrawal time. The growth is also taxed just once, at conversion time or withdrawal time (if still in a tIRA).


Note that the custodian does not know if you took the tax deduction or not and does not care. It is between you and the IRS (and state, if applicable).
Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 9:10 pm

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by Wakefield1 »

retiredjg wrote: Tue Nov 07, 2017 5:37 pm But you do realize there is no point in doing that, right? You achieve the same thing by contributing directly to Roth IRA...with less paperwork and more flexibility about withdrawing the money if needed.
O.P. could just do a Non-deductible IRA contribution and then convert to Roth inexpensively (if not eligible for a direct Roth contribution
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by retiredjg »

Wakefield1 wrote: Tue Nov 07, 2017 6:23 pm
retiredjg wrote: Tue Nov 07, 2017 5:37 pm But you do realize there is no point in doing that, right? You achieve the same thing by contributing directly to Roth IRA...with less paperwork and more flexibility about withdrawing the money if needed.
O.P. could just do a Non-deductible IRA contribution and then convert to Roth inexpensively (if not eligible for a direct Roth contribution
This is true, but what's the point? A person doing that will pay the same amount of tax and just have more paperwork.
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by kaneohe »

Wakefield1 wrote: Tue Nov 07, 2017 6:23 pm
retiredjg wrote: Tue Nov 07, 2017 5:37 pm But you do realize there is no point in doing that, right? You achieve the same thing by contributing directly to Roth IRA...with less paperwork and more flexibility about withdrawing the money if needed.
O.P. could just do a Non-deductible IRA contribution and then convert to Roth inexpensively (if not eligible for a direct Roth contribution
Perhaps, but if done under the wrong conditions, you could get no deduction for TIRA, but still pay lots for the conversion.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by retiredjg »

medelste, there might be one situation (using different dates) where what you suggest could be beneficial. However....from an earlier post, it appears your high income makes you inelliglble to deduct a contribution to tIRA anyway.

Maybe you should tell us more about what you have in mind so that you can get better answers.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by Alan S. »

There are some other implications of the choice to deduct the contribution or not, assuming you are eligible to deduct it. In most cases it is basically a wash, however:

1) A non deductible contribution will result in the conversion being non taxable except for gains, and that means it could be distributed from the Roth IRA in the first 5 years without a 10% penalty except for the penalty on any gains. Possible $550 positive impact over next 5 years.

2) But if the contribution happened to suffer a large loss before being converted, taking the deduction would result in a net reduction of AGI because the conversion would be taxed for a lower amount than the deduction received. A loss of 500 before conversion would result in taxable income being reduced by a net 500 in the current year.
JohnDoh
Posts: 291
Joined: Sat Nov 30, 2013 9:28 am

Re: Does an Traditional IRA contribution lose its deductibility if converted to a ROTH IRA?

Post by JohnDoh »

retiredjg wrote: Tue Nov 07, 2017 5:37 pm But you do realize there is no point in doing that, right? You achieve the same thing by contributing directly to Roth IRA...with less paperwork and more flexibility about withdrawing the money if needed.
This is not always true. In some states (e.g. IL), the conversion is state-tax-exempt. In those states, contributing to a deductible tIRA that is converted to Roth saves the amount of the state income tax (e.g. ~5% in IL).
Post Reply