No. of Recommendations: 1
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.

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