Quick IRA/tax question

[Franklin's Dad]

My wife and I filed separately in 2015 in order to save money on her student loan payments (she is making minimum payments for 10 years due to Public Service Loan Forgiveness). We funded the maximum $5,500 in a deductible IRA for her, because we thought it would reduce her AGI and help reduce student loan payments even further. Unfortunately, you can't actually deduct IRA contributions when you file separately (unless your income is $10,000 or lower).

So now she has that original $5,500 sitting in a tax-deferred account, but we never actually deferred any taxes on it. I want to just get it into a Roth account like I should have done originally, but I'm worried about then having to pay taxes on the conversion -- even though I shouldn't, because I never took a deduction to begin with.

Is this just a matter of having to fill out an extra form on our 2016 taxes or is there something else I have to do to ensure I don't end up getting penalized here?

 

[Matt]

My wife and I filed separately in 2015 in order to save money on her student loan payments (she is making minimum payments for 10 years due to Public Service Loan Forgiveness). We funded the maximum $5,500 in a deductible IRA for her, because we thought it would reduce her AGI and help reduce student loan payments even further. Unfortunately, you can't actually deduct IRA contributions when you file separately (unless your income is $10,000 or lower).

So now she has that original $5,500 sitting in a tax-deferred account, but we never actually deferred any taxes on it. I want to just get it into a Roth account like I should have done originally, but I'm worried about then having to pay taxes on the conversion -- even though I shouldn't, because I never took a deduction to begin with.

Is this just a matter of having to fill out an extra form on our 2016 taxes or is there something else I have to do to ensure I don't end up getting penalized here?

What does line 32 of her 2015 1040 say?
Does she have any other IRA balances beyond the $5500?

 

[Franklin's Dad]

What does line 32 of her 2015 1040 say?
Does she have any other IRA balances beyond the $5500?

Line 32 is blank, but that's the one that says "Credit for the elderly or disabled." Confused as to how that applies.

And no, that is her entire IRA balance.

 

[Franklin's Dad]

So I actually think I'm all set. I used HR Block free software when I filed for 2015, and they automatically created a Form 8606, which is what shows that she did not take a deduction in 2015. I guess I must have missed that originally.

 

[Matt]

Line 32 is blank, but that's the one that says "Credit for the elderly or disabled." Confused as to how that applies.

And no, that is her entire IRA balance.

This one:

 

[raenye]

Instead of converting, why not recharacterize the contribution?
(most information out there is about recharacterizing Roth as tIRA contributions, but the other way around is possible as well).

This can be done IIRC until the late filing deadline.

 

[Matt]

Instead of converting, why not recharacterize the contribution?
(most information out there is about recharacterizing Roth as tIRA contributions, but the other way around is possible as well).

This can be done IIRC until the late filing deadline.

I believe that is 10/15 in the year following. I.e. 2 months ago.

I was thinking 1040X plus 8606 to make it non deductible then roll to Roth with a little tax due on earnings, not contributions.

But before amending any return I'd want to know it was done correctly in the first place.

 

[MickiSue]

Matt: am I correct in believing that only the first $2000 of contributions to a traditional IRA is deductible, no matter how much you contribute?

 

[Matt]

Matt: am I correct in believing that only the first $2000 of contributions to a traditional IRA is deductible, no matter how much you contribute?

No. Generally speaking the full amount is deductible, but there are income minimums and maximums that influence that.

 

[MickiSue]

OK. Got it. I may have butted up against that max when I was researching it.

Thanks!