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Hi, looking for feedback if my thinking is correct.
DW has a Trad IRA that was openned via broker. Rolled it over to mutual fund and DW has been contributing to it (only $600 yr) My thinking is to have her stop it and instead open a Roth IRA (even using the same fund that the trad IRA is in. She has done well with that fund). She does get any tax benefit on the trad IRA as she belongs to a profit sharing program at work. The money currently contributing is extra money she has as she maxes out her profit sharing.

Does my thinking make sense?

Thanks

WW
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She does get any tax benefit on the trad IRA as she belongs to a profit sharing program at work.

I'll assume you meant to say she does NOT get any tax benefit on the TIRA...

I'll agree, I don't see any reason to continue the TIRA without any tax advantage while a Roth would offer a good tax advantage on future earnings.

-murray
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I'd definatly stop contributing to the traditional IRA since you get not tax deduction for it and go for the ROTH. You might even want to look at rolling over the tradational into a ROTH but that you would want to either be VERY confident as to what you are doing or hire a tax accountant to do it.
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You might even want to look at rolling over the tradational into a ROTH but that you would want to either be VERY confident as to what you are doing or hire a tax accountant to do it.

I think with asking a few questions around here, you could be confident enough to know what you were doing. You would just need to have records as to your deposited non-deductible amount, or be able to dig them up from broker and tax records.
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I think with asking a few questions around here, you could be confident enough to know what you were doing. You would just need to have records as to your deposited non-deductible amount, or be able to dig them up from broker and tax records.

There is no need to dig through broker records. An 8606 form is filed with the federal tax return each year non-deductible contributions were made to establish the cost basis in a Traditional IRA. Last years taxes would have the most current form and the total cost basis.

Debra
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On a completely irrelevant tangent, I have always wondered what the acronym 'DW' was but never asked. Anyone care to inform me on this? I assume it means "dear wife" but not sure. Thanks.
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And before anyone can hop on the opening for a joke, I don't think it means "dead weight!" :P
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yup, dear wife
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Hi, went ahead and cancelled monthly contributions and openned up a new Roth for DW. Choose one of the Target/lifecycle fund.
Will leave the T. IRA where it is. I looked into converting but thought against it since there will be a penalty fee for early withdrawal and then the taxes to take out would be high as our tax bracket is high so that would leave her with less money to work with. If I thought wrong, please correct.

Thanks
WW
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Will leave the T. IRA where it is. I looked into converting but thought against it since there will be a penalty fee for early withdrawal and then the taxes to take out would be high as our tax bracket is high so that would leave her with less money to work with. If I thought wrong, please correct.

There would be no penalty. Its a conversion, not a withdrawal.

There would be taxes, but not on the amount that is equal to the non-deductible distributions.

For instance, if $15,000 were deposited, $10,000 of which were non-deductible, and the current value is $21,000, then the taxable amount is $11,000 (value - non-deductible contributions). Depending on your situation, this may be an obvious yes, and obvious no, or a difficult choice

Note: If she has *any* other Traditional IRAs, including ones that 401Ks were rolled into, you have to include those in the numbers which could change the answer substantially.


http://www.irs.gov/publications/p590/ch01.html#d0e4612

Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable, later in this chapter.

Are Distributions Taxable:
http://www.irs.gov/publications/p590/ch01.html#d0e6132
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There would be no penalty. Its a conversion, not a withdrawal.

Hmmmm...when I called to ask about conversion, that they said it would be considered a withdrawal and the penalty would be there. What you said makes sense and what I thought as well. Will have to chase them up again.

Thanks
WW
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Yup, that's definitely wrong. And here's the proof that there's no penalty:

Allowable conversions You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply.

Source: http://www.irs.gov/publications/p590/ch01.html#d0e4612
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