If your IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily. You won't have to pay taxes on your account contributions (which have already been taxed), but you will owe taxes on account profits. You can make a non-deductible IRA contribution each year and then convert it into a Roth IRA using the clandestine method. You'll pay taxes on any converted amount that exceeds your base at the time of the conversion.
Your base should be calculated using a proportional or proportional formula if you have other IRA accounts. Your tax bill for a conversion to Roth will depend on the ratio between your non-deductible contributions and the total balance of all your traditional IRAs. In a clandestine Roth, investors make a non-deductible contribution to a traditional IRA and then quickly convert it to a Roth IRA. Once the money is in a Roth IRA, it's tax-free when you withdraw it (if you meet the age and retention period requirements).
This strategy only works if you don't have any other traditional IRA. Otherwise, the proportional rule applies. . However, anyone with earned income can contribute to an IRA regardless of how high their income is; in the worst case scenario, higher income levels may limit the deductibility of that IRA contribution (for those who are actively involved in an employer's retirement plan), but not the ability to make the IRA contribution.
Therefore, the IRAs of a husband and wife do not add up throughout the marital unit (even though the husband still adds up all of the husband's IRAs and the wife adds up all of the wife's IRAs). In addition, the reality is that current reporting systems on IRA contributions and conversions generally do not record (in automatic reports to the IRS on Forms 1099-R and 549) the exact days when a non-deductible IRA contribution and a conversion to Roth occurred, nor from which accounts (and if it was related to the same account). All IRA assets (including SEP and SIMPLE) must be aggregated and converted proportionally, based on the percentage of after-tax IRA assets in pre-tax IRA assets. Due to ongoing tax filing and reporting requirements, the prorated rule, and other complexities, non-deductible IRA contributions generally aren't worth it.
President Obama's budget recommendations earlier this year included, in the so-called Treasury Green Book, a proposal that would categorically prevent any after-tax fund in a retirement account from becoming a Roth, which would “put an end to most forms of Roth's clandestine strategies” (although it should be noted that it would still be possible if the owner of the IRA did not participate in an employer's retirement plan and continued to do so) a pre-tax IRA contribution for convert it). However, they can still indirectly divert money to a Roth IRA if they first make non-deductible contributions to a traditional IRA with after-tax dollars. The second chance that comes when employers' retirement plans are not included in the IRA aggregation rule is that funds from an IRA can be removed from the aggregation rule by transferring them to a 401 (k) plan or other employer plan. A prudent rule of thumb in the context of Roth's clandestine contribution is to wait one year (although it should be noted that Jeff Levine and the team at Ed Slott and Company believe that a much shorter period of time is sufficient, such as waiting for a return until an end-of-month statement is released demonstrating the contribution to the IRA being made).
Instead, Betsy decides to follow the “clandestine” Roth contribution strategy and makes a non-deductible contribution to the IRA on July 1, followed by a conversion to a Roth IRA on July 2 (as soon as the funds have been officially deposited in the IRA account and are available for transfer to the Roth IRA account). In addition, existing Roth IRAs, and associated after-tax contributions that go to Roth accounts, are also not added. So, in the end, what is a clandestine contribution from Roth? A clandestine contribution to a Roth IRA simply consists of making a contribution to the IRA (usually not deductible), followed by a subsequent conversion to Roth, even if you exceed income limits to make a normal contribution to the Roth IRA, all without violating the doctrine of tiered transactions. .