2010 Roth conversion help

[KTP]

We are thinking about opening two non-deductable IRA accounts in Dec 2009 and loading each up with the maximum $5000 contribution then roll them into Roth IRA accounts in 2010. My wife makes near 200k a year so we can't contribute to a regular IRA or a Roth.

First question: Since I do not work, I do not have any earned income. My wife can make the IRA contribution for me out of her income though, correct?

Second question: Can we add another $5000 to each of our non-deductable IRA accounts in Jan 2010, then convert them both to Roth IRA the next day? So sometime in Jan 2010 we would end up with two Roth accounts each with $10000?

Third question: It looks like right now you can continue to do this rollover each year after 2010...somewhat silly, but in Dec 2010 you could open another non-deductable IRA then roll it over in Jan 2011 to your existing Roth you created in 2010.

Fourth question: If all the previous questions are yes, would we be insane NOT to do this?

[KTP]

Uhg, some more researching has made the decision a lot more complicated.

I have about $15,000 already in a rollover IRA from my former employer's 401k plan. It rolled over at about a $3000 balance a few years ago and I managed to do some market timing to get it up to $15000 (really was just playing around with it since I didn't consider it serious money at the time).

I just read that the IRS will treat all IRAs as one account for a Roth rollover in determination of tax liability. So if I contribute 5000 in 2009 to a non-deductable IRA then try to roll over that $5000 to a Roth in 2010, the IRS will make me take a percentage of the $5000 out of the 401k rollover IRA I already have and a percentage out of the non-deductable IRA I created in 2009. Most of the money would come out of the taxable rollover IRA since it has a much higher balance. Thus I would end up having to pay a pretty high tax now on the rollover.

So I think it might only make sense to do the Roth for my wife, who has a 401k with her employer, but no other IRA.

[MonkeyMama]

I'll anwer your questions anyway, for others.

I think you asked a little bit about this before - I always try to add the caveat that this doesn't always makes sense if you have any other IRAs.

#1 - correct - spousal IRA contributions are okay.

#2 - yes. In fact, it is probably best to do so ASAP, because you would be taxed on the earnings. The original contribution was not tax-deductible to begin with, so there is no tax on converting it immediately. Any earnings/losses adds complication to it. (MEaning, the longer between contribution and conversion - the more taxes you may pay in the process).

#3 - I am not sure on this. You can do this any time your income is under $100k. As far as I am aware, 2010 is the only year that the income limit is removed. If Congress hasn't made it official yet - it is certainly their intention, that the $100k income limit is only removed for 2010.

#4 - Yes, you would be insane not to.

As to your further tax issues...

Yes, you are correct. I agree - I would do the ROTH for your wife, and let yours go.

[KTP]

Thanks MonkeyMama, I was hoping you would chime in!

It looks like we have all the questions answered and all bases covered. The question 3 about future rollovers after 2010 I threw in because I read somewhere (on fidelity?) that the current provision for the 2010 rollover doesn't specifiy an end date. It is possible that congress will want people in 2011, 2012, etc. to continue the rollover because it is yet another way for them to pay for programs by sacrificing the future (when someone does a rollover and pays taxes, they get money NOW instead of much later when said person retires). This government seems to like spending money, so maybe there will be more Roth opportunities after 2010.

On the other hand, like you said it probably doesn't make sense for me to pay a lot of taxes to roll over my rolled over 401k IRA into a Roth since I would pay ~35% taxes on it. I am not a big fan of paying the government now and hoping they treat me nice in the future. For my wife though, since she could rollover with no tax liability, it is a no brainer.

I hope our example cleared up any questions others may have had, or maybe they didn't even realize the IRS treats all of your IRA accounts as one single account when it comes to rollovers.

[happygirl]

This is a great topic. I've wondered about this myself.

I am getting ready to roll a few old 401k's into a traditional IRA (I haven't opened it yet. Sadly, I've been in denial about retirement until recently so I'm trying to play catch up now), then planned to add 5k for 2009 and another 5k in 2010. Our income is over the ROTH limit, but we planned to convert traditional IRA's to a ROTH in 2010. Is there anything I am missing in my plan? This is all so new to me so I appreciate the help.

[KTP]

MM will know way more about this than I do, but depending on your age, you may actually be able to make "catch up" contributions that exceed the $5000 limit. I am not really sure about this since I am still a young un (38).