Regular IRA for 2001 then recharacterize later?

[Guest phoenixazian]

Because I anticipate a much lower income in 2002 than I had last year, I am considering a regular IRA contribution for 2001 and then recharacterizing as a Roth sometime this year when my taxes will be significantly lower. Is this permitted and does this make sense to do? Thanks for any help.

[Appleby]

No.

Your 2002 income has no effect on your 2001 contribution. Any recharacterization of a 2001 contribution to a traditional IRA will just make the contribution a Roth IRA 2001 contribution. You are still in 2001.

[Guest phoenixazian]

Sorry, I used the wrong term. I meant to say that I would convert the traditional IRA to a Roth at a later date. Thus I would get the IRA deduction for 2001, a high tax year for me and then pay tax on the conversion to the Roth in a low tax year.

[John G]

Your posts show some confusion about the various options. I think you may be best served by just keeping things simple. Open the Roth for 2001 (and fund as well for 2002 now if you wish) as long as you meet the income qualifications. Clean and tidy.

While you might take the deduction option for 2001 with a regular IRA, when you later convert you will have to pay taxes on the full contribution PLUS all the earnings that may accumulate. So lets say you wait some years and your assets double... you might then end up paying taxes on $6,000. You also may run into the problem on not being able meet the income qualifications in future years. Another possible negative is any adverse change eminating from Congress.

Simple does have some advantages.

The taxes you might save on a tax bracket difference are probably in the $300 range assuming a $3,000 contribution and a 10% tax bracket delta. There are a lot of "ifs" built into that approach. Life just might conspire against it working out.