Permalink Submitted by Alan Spross on Sun, 2009-08-23 01:38
Taxation of either a distribution or Roth conversion must consider all of your traditional, SEP or SIMPLE IRA accounts. Your non deductible basis per Form 8606 is then pro rated against the total of all these IRAs to determine the tax free portion of a conversion. Therefore, no matter which of your IRA accounts you use for the conversion, the tax bill will be the same. You cannot reduce the tax bill by selecting the IRA account that received the non deductible contributions.
There is one possible way around this. If you are currently employed and your current qualified plan will accept rollovers from your IRA accounts, you can roll the pre tax amount into the qualified plan, leaving behind only the after tax basis. You can then convert the remainder tax free. But the problem here is that many qualified plans will not accept rollovers from IRAs that you have made regular contributions to because the plan cannot accept transfers of non deductible contributions and there are serious problems if they do. But in some cases, this is a possible solution.
This situation of pro rating using all IRAs applies to all years, not just 2010. If you look at Part I of Form 8606 it contains the formula to figure the taxable amount of a conversion,
Permalink Submitted by Alan Spross on Sun, 2009-08-23 01:38
Taxation of either a distribution or Roth conversion must consider all of your traditional, SEP or SIMPLE IRA accounts. Your non deductible basis per Form 8606 is then pro rated against the total of all these IRAs to determine the tax free portion of a conversion. Therefore, no matter which of your IRA accounts you use for the conversion, the tax bill will be the same. You cannot reduce the tax bill by selecting the IRA account that received the non deductible contributions.
There is one possible way around this. If you are currently employed and your current qualified plan will accept rollovers from your IRA accounts, you can roll the pre tax amount into the qualified plan, leaving behind only the after tax basis. You can then convert the remainder tax free. But the problem here is that many qualified plans will not accept rollovers from IRAs that you have made regular contributions to because the plan cannot accept transfers of non deductible contributions and there are serious problems if they do. But in some cases, this is a possible solution.
This situation of pro rating using all IRAs applies to all years, not just 2010. If you look at Part I of Form 8606 it contains the formula to figure the taxable amount of a conversion,