If I contributed to a trad IRA, but the IRS taxed me on it, so can I convert it to a Roth penalty free?

Question

I started a traditional IRA last year, but the IRS said I wasn't eligible to do so. What happens to that money? They're taxing me on the income, so will it have to stay in the traditional IRA or can I convert it to a Roth without penalty since they're taxing me on it? PS-I hate the IRS

Answer 1

You have to be eligible for a Roth, first.

So if you are eligible, yes, you can convert it but you'll have to pay the tax on any earnings beyond the initial contribution.

If you're not eligible you'll have to wait 'til 2010.

Answer 2

I would need to know why you were ineligible in order to say whether you could convert the IRA to a Roth IRA.

If you were not eligible to contribute to an IRA, whether deductible or not, then you cannot convert to a Roth.

If you were eligible to contribute to a nondeductible IRA, then if your income is below the threshold for a Roth, you can convert to a Roth. As mentioned, the threshold disappears in 2010 and you could convert at that time.

Answer 3

Why would you be ineligible? You would have to be passed retirement age. Write me - what EXACTLY did they tell you?

And btw, traditional IRAs are not tax free, they are tax deferred - you pay taxes after your retirement at the new tax rate. A ROTH IRA requires you pay the taxes up front, then at withdrawal you pay taxes on the profit. The IRS ALWAYS gets paid, not always right away, not always as much, but they always get paid.

There's penalties for early withdrawal and for failing to withdraw past a certain age - but ALL of this SHOULD have been explained to you.