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Subject:  Re: IRA Deductability for Low-income Minors Date:  12/19/1997  8:11 PM
Author:  TMFTaxes Number:  952 of 127637

<<Follow me so far? O.k., now, suppose that the parent of this child rolls over this IRA into a Roth
IRA after January 1, 1998. Can this rollover be treated as the rollover of a "non-deductible" IRA,
meaning that only dividends, interest, and capital gains would be taxed? Or, would the original
contribution to the 1997 IRA also be subject to taxation?>>

While the child's IRA deduction may not yeild any tax benefit, it would NOT be considered a "non-deductible" IRA, would have no "basis" for tax purposes, and would be subject to tax when it is rolled over to the Roth IRA.

Now, assuming that Junior's total income remains below the appropriate limit, then the additional imposition of 1/4th of the IRA rollover may also not cause any additional tax liability.

But, be assured, that if Junior's income is such that the rollover amount will be taxable, it will be taxes. In which case Junior will have received no tax benefit for making a deductible IRA, but will have tax liability on the rollover. And this is the same even if Junior didn't roll over the IRA, but simply kept it going for years and year. All of the "early" deductible IRA contributions would be subject to tax when they are distributed to Junior at some time in the future...even though Junior received no tax benefit when the IRA contribution was made.

Which is why it makes almost no sense to take an IRA contribution when there is no tax benefit attached to it...UNLESS you can do something with a Roth rollover...but that will be a one year shot deal.

TMF Taxes
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