Do you know about the ROTH transfer trick?

[J.Apple902]

I don't have a ROTH yet but I've been doing plenty of research on them. Everyone knows the salary limitations on a ROTH IRA are single filing salary of $110,000 or joint filing of $173,000.

As of 2009 law was changed so that the $5,000 annual cap is now subjected to personal contributions OR standard IRA transfers of $5,000. Which means even if you and your spouse make more than $173,000, you can still each contribute $5,000 per year via transfer and gain all the benefits of a powerful ROTH while having the high salary.

I haven't' found exact document proof of this, but I was hanging out with a cooperate finance guy this weekend and he knew a bunch of tricks. Anyone have any experience with this? Thanks!

[kv968]

I haven't done it but the best way to do it is contribute to NON-deductible IRA instead of a traditional and then roll it over. That way you don't have to pay the taxes on the contribution part of the rollover since you already paid them.

[J.Apple902]

great point

[Petunia 100]

I don't have a ROTH yet but I've been doing plenty of research on them. Everyone knows the salary limitations on a ROTH IRA are single filing salary of $110,000 or joint filing of $173,000.

As of 2009 law was changed so that the $5,000 annual cap is now subjected to personal contributions OR standard IRA transfers of $5,000. Which means even if you and your spouse make more than $173,000, you can still each contribute $5,000 per year via transfer and gain all the benefits of a powerful ROTH while having the high salary.

I haven't' found exact document proof of this, but I was hanging out with a cooperate finance guy this weekend and he knew a bunch of tricks. Anyone have any experience with this? Thanks!

J Apple, what has happened is that the income limitation on converting a traditional to a Roth has been eliminated. There is no limit on how much you can convert.

[Petunia 100]

I haven't done it but the best way to do it is contribute to NON-deductible IRA instead of a traditional and then roll it over. That way you don't have to pay the taxes on the contribution part of the rollover since you already paid them.

There is no such thing as a non-deductible IRA. Contributions to a traditional IRA can be deductible or not, depending upon your circumstances.

Sometimes a person will have both deductible and non-deductible contributions. In such cases, the person does not get to choose which contributions they are converting, they are deemed to be made proportionately. Keeping deductible contributions in one IRA account and non-deductible contributions in a second IRA account does not solve this problem, as the IRS views all of your traditional IRAs as one.

[Petunia 100]

I haven't' found exact document proof of this, but I was hanging out with a cooperate finance guy this weekend and he knew a bunch of tricks. Anyone have any experience with this? Thanks!

See IRS Publication 590, page 60.

http://www.irs.gov/pub/irs-pdf/p590.pdf

[kv968]

There is no such thing as a non-deductible IRA. Contributions to a traditional IRA can be deductible or not, depending upon your circumstances.

Sometimes a person will have both deductible and non-deductible contributions. In such cases, the person does not get to choose which contributions they are converting, they are deemed to be made proportionately. Keeping deductible contributions in one IRA account and non-deductible contributions in a second IRA account does not solve this problem, as the IRS views all of your traditional IRAs as one.

Sorry about that. I meant to suggest contributing to a traditional IRA but not taking the deduction if the OP hadn't already started a traditional IRA.

If he does already have one he could continue with a non-deduction but, as you said, he'd have to convert money from both proportionately.

[J.Apple902]

J Apple, what has happened is that the income limitation on converting a traditional to a Roth has been eliminated. There is no limit on how much you can convert.

Yes but the cap is still $5k correct?

[Petunia 100]

Yes but the cap is still $5k correct?

To contribute this year, yes. To convert this year, there is no cap. If you have 8 million sitting in a traditional IRA and want to convert it all this year, you can.

[J.Apple902]

To contribute this year, yes. To convert this year, there is no cap. If you have 8 million sitting in a traditional IRA and want to convert it all this year, you can.

Wow that's absolutely ridiculous. So is it true that some big time investors who could potentially have had millions of dollars in a standard IRA can simply transfer ALL of it to their ROTH so that it can have free growth until retirement? If so that is crazy good for individuals doing so.

[kv968]

Wow that's absolutely ridiculous. So is it true that some big time investors who could potentially have had millions of dollars in a standard IRA can simply transfer ALL of it to their ROTH so that it can have free growth until retirement? If so that is crazy good for individuals doing so.

You can transfer it all but you also have to pay taxes on it all too. Unless there was some non-deducted contributions.

[Petunia 100]

You can transfer it all but you also have to pay taxes on it all too. Unless there was some non-deducted contributions.

IMO, this is the real reason the income limit has gone away for conversions. They're not trying to do you a favor, they are trying to generate revenue and balance the budget.

[Slug]

Most people refer to these as "Backdoor Roths" I can't wait until I need one.

[BuckyBadger]

Yup, that's call ed a "Backdoor Roth." We did $5k each for me and my husband for the 2011 tax year, and already did another $10k for the 2012 tax year. We'll keep doing it as long as they let us.

Because we have no other non deductible IRAs, just other Roth IRAs, there is no additional tax to be paid during the conversion. We have only to pay tax on the dollar of two that the money might make in the day it takes between opening the non deductible IRA and converting it to a Roth.

[bennkar]

Not that it helps with the question, but I am very happy to have access to Roth type savings through my work's 457 plan. I've put in almost $6,000 already, and am looking to go to $11,000 in the Roth side with the same for my tax deferred side (I'm doing a 50/50 split). Yes I will hit 50 y.o. this year so I can put in bucketloads if I want. And with my mortgage gone... and no other debts period... well...