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My son and daughterinlaw earn more than the maximum allowed to contribute to a Roth IRA. They both have 401Ks at work. Can they contribute to Nondeductible IRAs and immediately convert the IRAs to Roth IRAs? If so, can they make a 2010 contribution by April 15, 2011?
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They can do the work-around of making the TIRA contribution and then immediately converting it to a Roth. I'm a little surprised that the recent Tax Relief Act didn't close up this loophole. But they should keep in mind that when they do the Roth conversion, they have to take into account the full value of all of their TIRAs when determining how much of the conversion is basis (after tax contributions). So if they have sizable TIRAs with little or no basis, the conversion will be mostly taxable to them as ordinary income. Hence, this strategy would work best for those with small or no TIRAs.

But a Roth conversion for a given year must be done by 12/31 of that year. So they would now be able to do a Roth conversion for 2011 but not for 2010. TIRA or RIRA contributions can be made for a given year up until April 15 of the next year.

BruceM
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My son and daughterinlaw earn more than the maximum allowed to contribute to a Roth IRA. They both have 401Ks at work. Can they contribute to Nondeductible IRAs and immediately convert the IRAs to Roth IRAs?

Yes, but if either of them has other IRAs (including rollover IRAs) that have pre-tax contributions or gains in them, there will be additional taxes, since the conversion will be pro-rated across all IRA accounts for each individual.

If so, can they make a 2010 contribution by April 15, 2011?

Contributions for 2010 can be made up until April 18, 2011. However, conversions are on a calendar year basis, so any conversion done in 2011 will be taxed in 2011, not 2010.

AJ
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"Contributions for 2010 can be made up until April 18, 2011. However, conversions are on a calendar year basis, so any conversion done in 2011 will be taxed in 2011, not 2010."

So a 2010 TIRA can be made before April 15, 2011, but the conversion is for 2011 tax year? Then can another 2011 TIRA contribution be made and converted this year? And since we are talking about nondeductible IRA conversions, there is no tax liability unless the temporary TIRA throws off income between establishment and conversion to Roth?
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So a 2010 TIRA can be made before April 15, 2011

The filing date for 2011 is April 18, not April 15, so contributions can be made until April 18.

but the conversion is for 2011 tax year?

Yes - conversions are based on the calendar year they are done in - there is no extension until the filing deadline, like for contributions.


Then can another 2011 TIRA contribution be made and converted this year?

Yes.

And since we are talking about nondeductible IRA conversions, there is no tax liability unless the temporary TIRA throws off income between establishment and conversion to Roth?

Again, assuming that each individual doing the conversion has NO OTHER IRAs with pre-tax contributions or gains, yes.

AJ
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