Someone here will know this, I am sure...
Background: I've contributed annually for many years to a traditional IRA (I didn't qualify for a Roth IRA because my income was too high). For the last 7 years, I have also made the maximum contribution annually to a 401(k). Last year, because the laws changed, my new financial advisor had me convert the traditional IRA money into a Roth IRA. I will pay taxes on that money this year. He also set me up to make monthly IRA contributions which are debited from my checking account.
Question #1: he set this up so that the money goes directly into a Roth IRA. My understanding is that, since my income still exceeds the Roth IRA limits, I must contribute to a tranditional IRA and then (as long as the laws allow it) covert that money to a Roth IRA periodically. He says it doesn't matter- as long as I was going to covert it to a Roth annually, it is okay to just skip that step and go directly into a Roth. This doesn't make sense to me because I think I need to pay taxes on that money now, rather than defer them. Who, if either of us, is correct?
Question #2: My tax advisor told me that, since I contribute to a 401(k), I "cannot have an IRA." He is a strange fellow, often lacking the ability to communicate clearly in non-CPA terms. He insists that I cannot have an IRA at all. I think he means that I cannot use an IRA to lower my taxable income because I am already using the 401(k) to do that. Again, who, if either of us, is correct?
And either way, wouldn't any IRA contributions on top of the 401(k) contributions need to be a traditional IRA?
I don't think you can skip the IRA step. The only legal way you can contribute is into the non-deductible IRA then convert. Going directly to the Roth will flag you to the IRS unless the investment officer's back office software "accepts" the cash into the IRA before re-characterizing it.
Originally Posted by mikey
As for the second issue, have him look at Form 8606 and the associated Publication 590.
AceOn6, the golf loving skating fan
So, I am right on both accounts
- Rep Power
You need a new advisor. Sounds like he doesn't know what he's talking about.
I've been doing this for a year now. I have a traditional IRA that I put a cash contribution into every month. Then when it clears, I role it over into the Roth IRA where I then purchase shares in mutual funds. Next year, hopefully, the tax hit won't be onerous b/c the interest accrued on the cash in my traditional IRA is miniscule.
Originally Posted by mikey
Are your advisors at all used to dealing with high net worth individuals? Not only are you right, but these are very basic questions that they should absolutely know the answers to. Care to post what company the advisor works for? I have a guess.