Roth Conversion of After Tax IRA
If someone makes a 2009 after-tax IRA contribution, can this be converted tax-free to a Roth IRA in 2010 without any tax consequences? Also, can someone convert previous years after-tax IRA contributions to a Roth IRA in 2010 without any tax consequences?
Thank you!
Permalink Submitted by Al Fry on Wed, 2009-12-30 21:34
From an income tax standpoint, a person only has one TIRA, regardles af how many TIRAs one actually owns and regardleass of when the contribution went in and whether they were deductible or not. Ed likes to use a “cream in the coffee” analogy. The cream is the non-deductible contribution; the coffee is the IRA balance. Once the contribution goes in, it comingles with the rest of the IRA. This means you cannot just take out (or convert) the non-deductible portion, just like you cannot extract only the cream. It would be pro-rated over the entire value of all TIRAS one owns. If you print off IRS Form 8606 and its intructions from IRS.gov, it pretty much makes the foregoing clearer.
Permalink Submitted by mk foss on Thu, 2009-12-31 02:03
To expand a little on Al’s excellent response.
You hear a lot of people saying that they will make a nondeductible IRA contribution in 2010 and immediately convert it to Roth. This works with no income tax if this 2010 IRA is the only one that you have at any point in 2010. If there are other IRAs – its the whole cream in the coffee scenario.
Even if you have no IRAs at present, if you make a nondeductible contribution now (or by 4/15/10) for 2009 + one for 2010 – it’s likely that there will be some tiny amount of earnings by the time you convert.
This is a really good idea but many who plan to use it are forgetting that other IRAs must be considered. Do as Al says, read the Form 8606 instructions.
Happy New Year,