The difference is in how the distributed funds are treated. The advantage of making Roth IRA contributions directly versus a back-door conversion is that the Roth IRA contributions can be withdrawn at any time with no federal income tax or 10% early distribution penalty. Making a nondeductible IRA contribution that is then converted to a Roth IRA is a conversion. Roth conversion funds are subject to a five year waiting period, for each conversion, for exemption from the 10% early distribution penalty if you are under age 59 ½. The ordering rules for Roth distributions state that the contributions will be deemed to be distributed first, then conversions – first in, first out.
I wrote a check on Dec. 27, 2011 for my IRA contribution for 2011. The receiving company did not open the mail until Jan. 3, 2012 so they applied the deposit as a 2012 contribution. Because I did not write on the check memo ‘2011 contribution’ they assumed it was for 2012.
They accepted the deposit into my account. Then at the end of 2012, I deposited $6000 for my 2012 IRA deposit, it wasn’t until I saw they funded the wrong account that they said, “oh you over funded your IRA for 2012.” I said, “no, that 2011 check was for my 2011 contribution.” They are stating because they did not receive it until 2012 they assume it’s for 2012. Taxes have been filed. Doesn’t the date of check mean something?
The IRS rules state that when filing a tax return or making IRA contributions, it’s the date of the postmark that matters. However, a custodian could have a policy that it’s the date they receive a check that matters to them.
Can a new traditional IRA deposit for the 2012 tax year be deposited into an existing "rollover" IRA from previous years that was rolled out of a corporately sponsored plan? I am having a disagreement with a CPA friend of mine. Thanks
Yes. In most cases, there is no longer a reason to keep rollover IRA funds separate from other IRA funds.