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I've been trying to piece this all together on my own and have slammed into a brick wall. My wife and I have $97K in her 401(k) and I rolled my 401(k) into a Traditional IRA a few yrs back, with it now around $44K. I do not have the ability to contribute to a 401(k) and we do not qualify for a Roth IRA or deductible Traditional IRA.

As a result, I opened this year non-deductible Traditional IRAs both for my wife and I, contributing the max $4K to each. I assumed that this was the smart move if we are allowed to convert these two accounts into Roth IRAs in 2010. However, I've seen postings that seemed to suggest that my 401(k) rollover Traditional IRA ($44K) could become a factor. Is this right? Even if I do not elect to roll that account into a Roth IRA?

I was planning on contributing the $4K for 2007 and $5K for 2008 for both non-deductible Traditional IRAs and then rolling them into Roth IRAs in 2010, with hopefully minimal tax impact given they couldn't have earned too much at that point.

Did I miss something in this calculation?

In order of your questions, yes, yes, and yes.

When there's after-tax money in any traditional IRA account you must lump all your traditional IRA accounts when calculating the taxable portion of a distribution from any account. Conversion to Roth is taxed as a distribution without the premature distribution penalty. See part I of Form 8606.

You. As things stand today the vast majority of any conversion will be taxable. You can get another $15,000 of after-tax money in there between now and 2010, which would somewhat lessen the blow, but you cannot do what you contemplated doing.

Your wife. Her 401(k) account doesn't enter into the process. If the account started with the 2007 nondeductible contribution is the only traditional IRA account she has, your plan can proceed apace as far as her accounts are concerned.

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