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Author: dcunited Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: IRA Deductability for Low-income Minors Date: 12/18/1997 7:53 PM
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Let us take the case of a child whose earned income during 1997 falls below $6,500, but exceeds $2,000. Next, let us suppose that a parent of this child opens a conventional IRA in the child's name for $2,000 during 1997. According to the definition of IRA deductibility, this IRA is a "deductible" IRA, because the child's AGI is well below the lower end of the AGI limit of $30,000. But, in point of fact, the child has no taxable income to declare for 1997, and, therefore, cannot take the IRA investment as a deduction.

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?
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Author: RednishFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 948 of 121114
Subject: Re: IRA Deductability for Low-income Minors Date: 12/18/1997 8:42 PM
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I believe you always have the option of making the child's IRA "non-deductible" even though he might qualify for it to be "deductible". Just fill out the necessary paper work with the child's 1997 tax return.

Your idea sounds good to me, but I certainly do not claim to be an expert. I have seen it recommended several places to buy a "non-deductible" IRA in 1997 and then convert to Roth early in 98 paying taxes on only the small gain if any.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 952 of 121114
Subject: Re: IRA Deductability for Low-income Minors Date: 12/19/1997 8:11 PM
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<<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
Roy

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Author: dkarp Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 956 of 121114
Subject: Re: IRA Deductability for Low-income Minors Date: 12/19/1997 9:15 PM
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<<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.>>


I understand that (in 1998 only) you can spread the effects of rolling over a regular IRA into a Roth IRA over 4 years. Is there any way to elect to avoid this 4-year spread-out and roll the IRA over all at once?

Also, are there any special tax forms (besides the IRA line on the 1040) that one must fill out to document regular IRA contributions? IRA contributions that turn out to be non-deductible?


Dan

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Author: mkunka Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 963 of 121114
Subject: Re: IRA Deductability for Low-income Minors Date: 12/20/1997 9:48 PM
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I believe the Regular-to-Roth IRA conversion is done all at once; it is the taxes that are spread out over 4 years if the conversion is done in 98.

There is an additional form for nondeductible IRA contributions but I have no idea what it is. Check out the IRA website under Forms and Publications.



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 971 of 121114
Subject: Re: IRA Deductability for Low-income Minors Date: 12/21/1997 9:13 PM
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<<I understand that (in 1998 only) you can spread the effects of rolling over a regular IRA into a Roth
IRA over 4 years. Is there any way to elect to avoid this 4-year spread-out and roll the IRA over
all at once?>>

Nope...sorry, Dan. The law is clear that the "spreading" of the income is not an election, but something that must be done if you take the rollover in 1998.

<< Also, are there any special tax forms (besides the IRA line on the 1040) that one must fill out to
document regular IRA contributions? IRA contributions that turn out to be non-deductible?>>

The form that you will want to use is Form 8606. This form reports the IRA as non-deductible, and tracks your tax basis in your IRA for future tax reference. You can view/download Form 8606 at the IRS web site (http://www.irs.ustreas.gov).

TMF Taxes
Roy

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