If you have a non-deductible IRA, you can convert it to a Roth IRA. You won't have to pay taxes on your contributions to the account, but on the profits in the account. You won't have to pay taxes on your account contributions, but account earnings will be taxable at the time of conversion. .
If the IRA contribution is deductible, the end result will be a contribution to an IRA that generates a tax deduction, followed by a conversion to Roth that will cause the IRA's income to be recognized for tax purposes. That leaves you with that work plan you should take advantage of, especially if your employer offers you equivalent money and a non-deductible IRA. By making a non-deductible contribution to an IRA and immediately converting that contribution to a Roth IRA, you can fund a Roth IRA if you don't qualify. If there is a deliberate interval of time between when the non-deductible contribution to the IRA is made and the time when the subsequent conversion to Roth occurs, it is easier to say that the final result of the dollars in the Roth was not part of a single intention to circumvent the rules.
If you convert your non-deductible contributions to a Roth IRA, you'll likely owe some taxes for this conversion. Instead, Betsy decides to follow the “clandestine” Roth contribution strategy and makes a non-deductible contribution to the IRA on July 1, followed by a conversion to a Roth IRA on July 2 (as soon as the funds have been officially deposited in the IRA account and are available for transfer to the Roth IRA account). For many people, especially those with higher incomes, a non-deductible IRA is just one stop on the road to converting those funds into a Roth IRA, using a “clandestine” Roth IRA. If your IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily.
However, the rules you'll need to follow will depend on whether you only have non-deductible IRAs or deductible and deductible IRAs. So, by bringing the two together, people with higher incomes who can't make a contribution to a Roth IRA can effectively get around income thresholds by making a non-deductible IRA contribution (allowed even at high income levels) and then convert it to a Roth IRA (also allowed even at high income levels). People who contribute to a non-deductible IRA usually do so because their incomes are too high to contribute to a Roth IRA or deduct their contributions to a traditional IRA. The biggest advantage of converting a non-deductible IRA into a Roth one and taking on the tax impact of the conversion is that all future earnings in the account are not taxable when the money is withdrawn at retirement age.
IRA Taxpayers should be careful when reporting charitable IRA donations on their tax returns, or they may end up overpaying Uncle Sam. In addition, existing Roth IRAs, and associated after-tax contributions that go to Roth accounts, are also not added. So, in the end, what is a clandestine contribution from Roth? A clandestine contribution to a Roth IRA simply consists of making a contribution to the IRA (usually not deductible), followed by a subsequent conversion to the Roth IRA, even if you otherwise exceed income limits to make a normal contribution to the Roth IRA, all without violating the doctrine of tiered transactions. In addition, the reality is that current reporting systems for IRA contributions and conversions generally do not record (in automatic reports to the IRS on Forms 1099-R and 549) the exact days when a non-deductible IRA contribution and a conversion to Roth occurred, nor from which accounts (and if it was related to the same account).