Can't do a Roth

[pearlieq]

DH and I may be faced with the happy problem of having too much income to qualify for our Roths next year.

When that's the case, what should one do?

My first thought is to put the money in traditional IRAs and wait until I can do a Roth conversion in 2010.

Would the money be double taxed then? We won't be able to deduct the IRA contribution, of course, meaning it's made with after-tax dollars. Will be taxed again on the money when we convert? We're young enough that I think it would still be worth it, but I just wanted to know exactly what would happen.

Would anyone recommend doing something else instead?

[sweeps]

Re: Can't do a Roth

Currently, yes, the 2010 Roth-conversion loophole is an option. Keep in mind though that the tax law can change again. Also be sure to read the section under "Implications": Link

Will you barely be above the income limit, or are you substantially over the limit? If you're barely over the limit, you might be able to do some things (for example, contribute some extra to a 401k) to lower your taxable income and get yourself under the limit.

[creditcardfree]

Re: Can't do a Roth

No you would not be double taxed. When you make your non deductible traditional ira contribution you will fill out from 8606 with your tax return that shows that you did not take a deduction on those funds. That then will help you when you convert the traditional ira to the roth. Only deductible funds in a traditional ira would be taxed during the conversion.

[disneysteve]

Re: Can't do a Roth

If you contribute to a non-deductible IRA, are the proceeds still taxed in retirement? If so, wouldn't you be paying taxes twice on the same money? Just curious, and it might apply to the OP.

[pearlieq]

Re: Can't do a Roth

If you contribute to a non-deductible IRA, are the proceeds still taxed in retirement? If so, wouldn't you be paying taxes twice on the same money? Just curious, and it might apply to the OP.

That's my understanding of the situation, which is why I'm willing to put money in a non-deductable IRA only if converting it to a Roth in 2010 is an option.

If a Roth conversion is not a viable option we'll probably just open a taxable account.

To answer your question, Sweepsplayer, we will be well over the limit, even after taking advantage of available tax shelters.

[sweeps]

Re: Can't do a Roth

No. Going in, the contribution gets taxed. Coming out only the earnings are taxed.

But the spirit of your post is well-taken. Nondeductible IRAs aren't that great. Assuming the tax laws don't change again though, they can be very useful for this Roth conversion loophole.

[creditcardfree]

Re: Can't do a Roth

I second Sweeps!