non-income tax consequences of Roth IRA conversion
Today’s Washington Post said that there were circumstances in which one could convert a traditional IRA into a Roth IRA without income tax consequences. I was unclear as to those circumstances.
In addition, it said that one could determine one could not pay taxes on the non-deductible portion of the IRA would be taxed. My IRAs are quite old. How could I (or anyone) determine that amount?
Obviously, the most attractive option is the first: being able to convert all IRAs into Roths with zero tax consequences. Incidentally, assuming that is possible, why would not everyone do that? Is there any reason NOT to have an IRA as a Roth IRA?
Thank you.
Permalink Submitted by Alan Spross on Sun, 2008-12-28 23:28
The amount of any Roth conversion that is tax free is based on the portion of your TIRA that is from non deductible contributions or rollover of after tax employer plan contributions vrs the total adjusted year end value of all your TIRA, SEP and SIMPLE IRA accounts.
This factor is generated by Form 8606, which must be filed for each year a non deductible contribution is made and is also calculated on the 8606 filed to report the conversion. If a taxpayer has failed to file an 8606 for any year, they can be filed retroactively, one for each year to document the amount of non deductible contributions.
In order to have no pre tax amounts in a TIRA, there can be no earnings in the IRAs. The notion of a tax free conversion popped up in recent years when those taxpayers who had no TIRA or Roth IRA due to income limits, learned that they could convert to a Roth in 2010 or later with no income limit applying. Therefore, a non deductible TIRA contribution converted to a Roth in 2010 would not be taxable except to the extent there was a prior balance in TIRAs or to the extent of earnings on the recent contributions. If such a conversion is not tax free, it could still be mostly tax free on a pro rated basis.
If your TIRAs are old, there is probably a considerable earnings component, so any conversion would be mostly taxable. But be sure you filed Form 8606 for any past years. You will need them even if you do not convert to prevent distributions from being double taxed.
Permalink Submitted by charles lore on Tue, 2008-12-30 01:25
Also if you have an active qualified plan you can roll all your taxable funds ( deductible contributions and earnings )to QP leaving only after tax funds in TIRA . ( not allowed to roll after tax to qp) Now you can convert the TIRA to Roth without a tax. If you dont make this move each dollar you convert will be a blend of taxable and non taxable ,, typically the lions share taxable.
Maybe the WP article wass talking about this?
Permalink Submitted by Alan Spross on Tue, 2008-12-30 01:30
Possibly, but many of these articles are short on the details required to accomplish the goal intended. But what you indicated would certainly work if their current QRP would accept a rollover of the entire pre tax portion of the IRA.