TAX IMPLICATIONS OF CONVERSION TO ROTH IRA IN 2010
Since my AGI exceeds the contrbution limits for a Roth IRA, I have been funding a regular IRA for the last several years with the intention of converting it to a Roth IRA in 2010. The contributions to the regular IRA were on an after-tax basis. When I convert this IRA to a Roth IRA, will all of my IRA be subject to income tax, or will just the earnings during the time be subject to income taxes. I’ve heard that the latter is the case, but cannot find a resource that confirms it. Would appreciate any information on this.
Permalink Submitted by Alan Spross on Fri, 2010-01-01 20:47
Only the earnings will be taxed if you never made deductible contributions to your IRA, otherwise you would be double taxed. You should have reported all those non deductible contributions you made each year on Form 8606. This same form is used to report your conversion, and if you follow the 8606 instructions your conversion will be tax free to the extent of the percentage of your total adjusted balance that is composed of non deductible contributions. You cannot choose to convert only the non deductible amounts, and all your traditional IRA accounts are considered as combined for pusposes of calculating the taxable amount of you conversion.
In the event you failed to report each non deductible contribution in the past on Form 8606, you should file them retroactively and on a stand alone basis with the IRS to prevent the double taxation of non deductible contributions when you take distributions or convert to a Roth IRA.
Permalink Submitted by Jehan Ghouse on Sat, 2010-01-02 16:04
Thanks Alan for your clear response! I have a related question, but will post it in another thread.