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Old 08-21-2015, 01:50 PM
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Join Date: Aug 2015
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Roth to IRA, back to Roth

Hi,
I'm not sure if this is a unique situation, but I wasn't able to find any reference to it on previous posts or anywhere else online for that matter.

3yrs ago I made a $5000 after-tax contribution to my Roth IRA. I later found out that I was not allowed to contribute that year due to exceeding the household income limit, so I converted the entire contribution to a traditional IRA.
For 2015, we will be able to contribute to a Roth since our income is now below the limit. My question is, if I convert my traditional IRA back to a Roth this year, will I be taxed on the the initial $5000 (which was the after-tax contribution originally)? Seems like I will be taxed twice in that case.

Appreciate any advice. Thanks for your time.



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Old 08-22-2015, 02:01 PM
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Originally Posted by ghostserver View Post
Hi,
I'm not sure if this is a unique situation, but I wasn't able to find any reference to it on previous posts or anywhere else online for that matter.

3yrs ago I made a $5000 after-tax contribution to my Roth IRA. I later found out that I was not allowed to contribute that year due to exceeding the household income limit, so I converted the entire contribution to a traditional IRA.
For 2015, we will be able to contribute to a Roth since our income is now below the limit. My question is, if I convert my traditional IRA back to a Roth this year, will I be taxed on the the initial $5000 (which was the after-tax contribution originally)? Seems like I will be taxed twice in that case.
I guess this is IRA conversion rule NOT double taxation . Many individuals that did not qualify for income reasons end up investing in traditional IRAs. With a traditional IRA you receive a tax break today, deductible contributions, but pay income taxes in retirement. But as you know, your contributions to a R-IRA are not tax-deductible.
You should NOT make a R-IRA conversion without having some idea how much tax the conversion will cost. You have to be aware that the conversion itself can move you into a higher tax bracket. You need to know 1) what your tax bracket is, and 2) how much additional income you can report before you move up into the next tax bracket. Some people worry that if they move into a higher tax bracket, all of their income will be taxed at a higher rate. That’s wrong. Only the part of your income falling in the higher tax bracket gets taxed at the higher rate. Say, you are in the 15% bracket and have $1K of income that’s in the 25% bracket, you’ll pay $250 of tax, 25%*$1K on that extra $1K but still pay lower rates on the rest of your income.
In the past to be able to convert from a Traditional IRA to a R-IRA your income needed to be under $100K. But now, there is no longer an income cap in place.With the cap removed high income earners can now convert as long as they pay the appropriate tax on the conversion from traditional IRA to R-IRA. There is no 10% early withdrawal penalty if the funds move from the traditional IRA to the R-IRA in a 60 day window. The deadline to recharacterize R-IRA conversion contributions to a traditional IRA is generally Oct. 15 if you file your federal income tax return (or file for an extension) on time.



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Old 08-25-2015, 12:50 AM
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Thank you for the detailed answer. That was a lot of good information there and will definitely know figure out the tax consequences of a traditional IRA to Roth IRA conversion. Good to know that the $100K income cap for the conversion is no longer in effect.

I looked over the relevant tax return for the year that I had to recharacterize the Roth to a traditional IRA. I did not see any deductions related to this recharacterization. Upon looking into it further, it appears that there is no tax benefit to contributing to an IRA if income is over $180,000 or if I or my spouse has a workplace retirement plan. Therefore any contribution to a traditional IRA under this scenerio is pretty much an aftertax contribution.

I understand now why a conversion back to a Roth IRA is not a case of double taxation, but rather the result of a conversion, as you mention. Thanks so much for the help!



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Old 08-25-2015, 01:25 AM
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Originally Posted by ghostserver View Post
Thank you for the detailed answer. That was a lot of good information there and will definitely know figure out the tax consequences of a traditional IRA to Roth IRA conversion. Good to know that the $100K income cap for the conversion is no longer in effect.

I looked over the relevant tax return for the year that I had to recharacterize the Roth to a traditional IRA. I did not see any deductions related to this recharacterization. Upon looking into it further, it appears that there is no tax benefit to contributing to an IRA if income is over $180,000 or if I or my spouse has a workplace retirement plan. Therefore any contribution to a traditional IRA under this scenerio is pretty much an aftertax contribution.

I understand now why a conversion back to a Roth IRA is not a case of double taxation, but rather the result of a conversion, as you mention. Thanks so much for the help!
Thank you for the detailed answer. That was a lot of good information there and will definitely know figure out the tax consequences of a traditional IRA to Roth IRA conversion. Good to know that the $100K income cap for the conversion is no longer in effect.======>.Agreed.

I looked over the relevant tax return for the year that I had to recharacterize the Roth to a traditional IRA. I did not see any deductions related to this recharacterization. Upon looking into it further, it appears that there is no tax benefit to contributing to an IRA if income is over $180,000 or if I or my spouse has a workplace retirement plan. Therefore any contribution to a traditional IRA under this scenerio is pretty much an aftertax contribution. =======>>> UNLESS you are covered by an employer-sponsored retirement plan at work, your contribution to a traditional IRA is always tax-deductible, regardless of your modified adjusted gross income. However, if either you or your spouse is covered by an employer, you may not be allowed to deduct your contribution from your taxes.You do not need to notify your IRA custodian that you will make non-deductible IRA contributions. However, you should notify IRS that you have made non-deductible contributions to your IRA with Form 8606 when you file your tax return. It is your responsibility to keep track of the basis (the amount of non-deductible contributions) in your IRA. When you take a withdrawal from your traditional IRA, you , generally , need to pay taxes on the entire amount unless you have nondeductible contributions in the IRA. If so, the percentage of the withdrawal equal to the percentage of nondeductible contributions in the account comes out tax-free. For example, say, your IRA is worth $100K and includes $20K in nondeductible contributions, 20 %of your withdrawal would be tax-free as it is nondeductible contributions. Furthermore let say, at some point in the future you decide to convert your traditional IRA to a R-IRA again , then, the portion of the conversion that comes from nondeductible contributions can be converted tax-free. As said, money that you roll over from a traditional IRA to a R-IRA that comes from earnings or deductible IRA contributions must be included as taxable income in the year you make the rollover. Say, if you converted $5K of nondeductible contributions and $15K of earnings and deductible contributions from a traditional IRA to a Roth IRA, you would have to include ONLY $15K, not $20K, of taxable income on your taxes

I understand now why a conversion back to a Roth IRA is not a case of double taxation, but rather the result of a conversion, as you mention==>OK .



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