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Author: dennisk101 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76115  
Subject: Immediate Conversion to Roth Date: 4/15/2010 12:41 PM
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My daughter has had a Roth IRA for several years but no traditional IRA. She has just established a traditional IRA (I think treating the contribution as one for 2009), taking the deduction on the return she just filed. Can she immediately convert this to a Roth? If so, she will have no gain to report, because the traditional IRA was just established and she has no other traditional IRAs. This looks like a no-brainer, as she gets the deduction for 2009 but all the money ends up in a Roth. That's the reason I feel there must be some sort of rule prohibiting this. Can someone inform me? Thanks much!

Dennis
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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66953 of 76115
Subject: Re: Immediate Conversion to Roth Date: 4/15/2010 1:03 PM
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>> This looks like a no-brainer, as she gets the deduction for 2009 but all the money ends up in a Roth. That's the reason I feel there must be some sort of rule prohibiting this. Can someone inform me? Thanks much! <<

I don't believe there's a problem with this. It's really not a free lunch, as you will be "paying back" the value of the 2009 tax deduction with the taxes paid on the conversion in 2010.

#29

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66955 of 76115
Subject: Re: Immediate Conversion to Roth Date: 4/15/2010 3:47 PM
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taking the deduction on the return she just filed. Can she immediately convert this to a Roth? If so, she will have no gain to report, because the traditional IRA was just established and she has no other traditional IRAs. This looks like a no-brainer, as she gets the deduction for 2009 but all the money ends up in a Roth.

While there is no 'gain' to report, there is still $5000 (or whatever she contributed) that has not been taxed. When she converts now, it will be considered taxable income of the amount converted, which will be taxed as income either 50% in 2011 and 50% in 2012, or if she prefers, 100% of the income in 2010. (She needs to look at the income tax rate changes that will occur in 2011 to see if she thinks she will be affected.)

That's the reason I feel there must be some sort of rule prohibiting this. Can someone inform me?

She will still pay taxes on the amount contributed, just later than she would have if she just contributed it directly.

AJ

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Author: dennisk101 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66956 of 76115
Subject: Re: Immediate Conversion to Roth Date: 4/16/2010 12:49 AM
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While there is no 'gain' to report, there is still $5000 (or whatever she contributed) that has not been taxed. When she converts now, it will be considered taxable income of the amount converted, which will be taxed as income either 50% in 2011 and 50% in 2012, or if she prefers, 100% of the income in 2010. (She needs to look at the income tax rate changes that will occur in 2011 to see if she thinks she will be affected.)

Yes, of course, I should have seen that the 5K contribution would be taxed on the conversion. Thanks much!

Dennis

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66957 of 76115
Subject: Re: Immediate Conversion to Roth Date: 4/16/2010 8:21 AM
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My daughter has had a Roth IRA for several years but no traditional IRA.

I'm wondering why this is a concern and why she would want to have 2 different accounts if there was no need. The IRA contribution limit is a total limit no matter which type of IRA you use.

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