How to Convert a Non-Deductible IRA to a Roth Each Year
Individual Retirement Account owners who make more than $120,000 if single, or $177,000 jointly if married, are not allowed to contribute to a tax-free Roth IRA. Those who don't qualify for the Roth contribution income limits may contribute to a traditional IRA. If they don't meet the income limits for deductions, the contributions to the traditional IRA are non-deductible, meaning after tax money. Because there are no income limits for converting a traditional IRA into a Roth IRA, those with non-deductible IRAs may want to convert the annual contribution into a Roth IRA to reduce long-term tax consequences on earnings.
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Instructions
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Call the custodian of the traditional IRA confirming your personal information to access your account and get the service you need.
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Request a Roth conversion form. Each custodian has its own procedure, with some requiring a new Roth account to be open prior to conversion. Others only need a conversion form. Comply with the IRA custodian requirements.
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Submit all required forms to the IRA custodian.
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Obtain both the 1099-R and 5498 from the IRA custodian in January following the conversion. The amount distributed should equal the amount converted.
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Record any earnings converted above the contributed amount on Line 15 of IRS Form 1040. The contributions were already after-tax dollars, so only the earnings need to be added to gross income.
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Contribute to a non-deductible IRA each year and then fill out conversion paperwork transferring the money into the already existing Roth IRA.
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Tips & Warnings
The 2010 Roth contribution limits are for single and married filers regardless of whether or not the filers are covered by an employer retirement plan. To make a complete contribution, single filers must make less than $105,000 in gross income, with partial contributions allowed up to $120,000. Married couples filing joint returns must make less than $167,000, with partial contributions allowed up to $177,000.
Deductible IRA income limits vary depending on whether filers are covered by employer plans. Single filers covered by an employer plan have limits starting at $56,000 up to $66,000. Those not covered by an employer plan have no income limit. Married filers filing joint returns have a income span of $89,000 capping out at $109,000. Couples not covered by an employer plan have limits at $167,000 capped at $177,000.
