conversion to ROTH – must SEP-IRA factor into total?
I understand when converting to a ROTH we have to look at total of all IRA accounts and take equally from all accounts — we can’t pick and choose which IRA to convert and leave other IRAs alone. But, in calculating the total of IRAs does that include SEP-IRAs, too, or just Traditional IRAs?
Ideally I’d like to get rid of the one Traditional IRA I have, which is not very much money, and convert that to a ROTH, leaving me with no Traditional IRA account. But there are several SEP-IRA accounts which are more substantial. Must those also be depleted by some amount, along with the Traditional IRA? Or are SEPs not part of this equation?
Permalink Submitted by Alan Spross on Tue, 2010-03-09 23:00
You can convert any particular IRA you want. However, for purposes of determining the taxable portion of the conversion, all of your TIRA, SEP IRA and SIMPLE IRA accounts must be considered. Since a SEP is fully pre tax, if you have non deductible contributions in your TIRA, the SEP accounts would make more of the conversion taxable. But if you have NO non deductible contributions in any of these accounts, you can just convert whatever parts of any of the accounts you wish since your entire conversion will be taxable.
You did not mention that you had any non deductible contributions that you would have reported on Form 8606 in the year you made the contributions, so perhaps your conversion will be fully taxable.
Permalink Submitted by ray perez on Wed, 2010-03-10 04:18
Good point. Actually there are non-deductible contributions which have been tracked by 8606 forms every year. No distributions have been taken (too young). The bulk of funds are in pre-tax SEP-IRA. How does that, combined with the basis in the non-deductible Traditional IRA impact the calculation of taxable portion?
Permalink Submitted by Alan Spross on Wed, 2010-03-10 04:31
You would just follow the Inst for Part I of Form 8606. Basically, the % of basis from your non deductible contributions to the TIRA with respect to the adjusted year end value of the TIRA and SEP IRAs is the tax free % of the conversion. The adjustment is that you add the converted amount to the year end value.
Example: Total value of TIRA and SEP IRAs at year end: 70,000 plus 30,000 conversion = 100,000
8606 value of total non deductible IRA contributions 16,000
16% of the 30,000 will be tax free. That is 4,800 and your remaining basis in your TIRA is reduced to 11,200 for future years.