Can I contribute to an IRA, then convert to Roth?

May 5, 2014 

I earn too much to contribute to a Roth IRA. Can I contribute to a traditional IRA and immediately convert it to a Roth? Do I have to pay taxes on the conversion?

Your plan is a perfectly legal back-door entry to a Roth IRA. For 2014, direct Roth contributions are banned for singles with adjusted gross income over $129,000 and couples filing a joint return reporting AGI over $191,000. But there’s no income limit on contributions to a traditional IRA or for converting one to a Roth. You have until April 15, 2015, to contribute up to $5,500 to an IRA for 2014 (or up to $6,500 if you turn 50 or older in 2014).

There’s no legal requirement for how long the money needs to be in the traditional IRA before moving it to a Roth. But Ken Hevert, vice president of retirement products for Fidelity, notes that it could take a few days before the money is available for the rollover. Check with the traditional IRA sponsor about timing.

Jim Blankenship, a certified financial planner in New Berlin, Illinois, generally advises clients to wait at least a few days for recordkeeping purposes (and even as long as a month) before making the conversion. If the contribution and the conversion are on separate monthly statements, he says, it is clear that the original contribution was to a traditional IRA rather than a Roth.

The tax issue is trickier. I’ll assume that you make a nondeductible contribution to the traditional IRA. If the new contribution is the first and only money you have put in a traditional IRA, you’ll owe tax only on any earnings between the time of the contribution and the conversion. But if you have other money in traditional IRAs, your tax bill will be based on the ratio of your nondeductible contribution to the total balance in all of your traditional IRAs.

So if you make a nondeductible contribution of $5,500 this year and that brings your total in traditional IRAs to $50,000, converting $5,500 to a Roth would trigger a tax on $4,895. Because $5,500 is 11 percent of $50,000, 11 percent of the conversion ($605) is considered tax-free; the other 89 percent ($4,895) is considered pretax money moving from your traditional IRAs to the Roth. If you convert the traditional IRA to a Roth now, you’ll report the conversion on your 2014 return, which you’ll file next spring. After the conversion, the money grows tax-free in the Roth.

Kimberly Lankford is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.

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